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Financing Closing Costs: Is it Worth it?

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closing-cost-basicsFinancing closing costs might save you having to come up with a lot of cash, but is it worthwhile doing? Here we shall discuss closing costs and the pros and cons of financing them in full or in part.

Closing costs include items such as loan-origination fees (0.5% – 1.5% of loan amount,) credit check fees, title fees, mortgage insurance (1 year in advance,) points for mortgage interest discounts and more. When combined, mortgage fees can total around 2% – 4% of the purchase price of the property. So, if you buy a home at $200,000, the closing fee can be as high as $8,000.

Financing Closing Costs in the Mortgage

If you roll your closing costs into your mortgage loan you will be paying a lot more than $8,000 over the term of the loan – particularly if that is 30 years. You will be paying closing fees for 30 years, and also interest on them.

$8,000 in costs, amortized over 30 years at 4.0% interest, would involve an extra $38.19 on your monthly repayment figure. Work that out over the term and financing closing costs of $8,000 would cost you a total of $13,748.40, or $5,748.40 extra.

Partially Financing Closing Costs.

An option is to ask the seller to help out with closing costs. This is not uncommon when real estate markets are in a downturn, and it is a buyer’s market. If the seller is keen to sell, then they may be open to doing this just to get their property sold. However, your lender might restrict the amount that the seller is permitted to contribute in this way. FHA insured mortgages, for example, tend to have such restrictions.

LTV and Closing Costs

As you now have realized, arranging for your closing costs to be included in your mortgage loan is not so easy. It is not a standard option, such as choosing a fixed interest rate or an adjustable rate. You must meet certain criteria, an important one of which is you persuading the lender to give you a mortgage loan greater than the value of the property. In other words for them to offer an LTV (loan to value) of greater than 1.0.

Rolling Closing Costs into Refinance or Reverse Mortgage Loans

Because this is very abnormal, it is more common for closing costs to be financed when refinancing a mortgage or arranging a reverse mortgage, where the total finance can involve a higher proportion of your equity than you are receiving in cash.

For example, let’s say you have $150,000 equity in a $200,000 home, and are seeking equity release of $60,000 for a home improvement. Your closing costs might be $1,000. You can add this to your loan and repay $61,000. The equity still in your home warrants this.


Financing closing costs is not common for first mortgages. It is unusual for the buyer to be able to add these costs to the loan due to the effect on the LTV. It more common to finance closing costs in this fashion with refinance agreements since there tends to be sufficient equity in the home to offer the lender an appropriate level of security.


However you do it, rolling your closing costs into a home loan will cost you extra. This cash will also be unavailable for you to invest, thus compounding the potential cost. Unless you intend to use the cash you save initially to invest in higher yield investments, it is best to consider your own financial situation. If you are unable to pay your closing costs, then you are advised either to seek a lower priced home or wait a while longer until you have more funds available. Financing closing costs is not always the best solution.

Mortgage Amortization and Mortgage Repayments

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mortgage-amortization-basicsMortgage amortization is designed to allow you to pay the same monthly mortgage repayments for the entire term of your mortgage loan. The interest on a mortgage is a large part of your monthly repayment. However, it reduces each month – why is that when your payment remains the same? Briefly, the relative amounts you pay towards interest and principal change with each repayment you make: as your interest reduces, you pay more of the principal.

Here is how mortgage amortization works.

Why Mortgage Amortization is Used

The term ‘amortization’ is derived from the old English ‘amortisen’ and ultimately from the Latin ‘admortire,’ both meaning ‘to kill.’ Mortgage amortization is the killing-off, or total repayment, of a mortgage loan and the interest charged.

During the process of amortization, the monthly mortgage interest due is charged at one-twelfth of the annual rate, based upon the principal still owed at the beginning of each month. So, just for argument sake, if your mortgage rate was 6% and you had borrowed $240,000, the interest due at the end of month 1 would 6/12 = 0.5% of $240,000 or $1,200. At the end of month 2 it would be less, because you would also have paid part of the principal.

Had you borrowed the loan over 30 years, then the principal at month 1 would be $240,000. If you paid without amortization, would pay $240,000/30/12 = $666.67 capital each month. You would then start with a payment of $1,866.67 in month 1: $1,200 interest and $666.67 capital.) The principal mortgage repayments would remain the same for 30 years, while the interest due each month will reduce.

How Mortgage Repayments are Calculated

This is not what most people want. They want to pay the same amount every month, so they can afford the initial payments, which then become a progressively small we proportion of their income as they earn more. That is how mortgage amortization works – to enable that to be achieved.

The total interest payable over 30 years with the capital reducing each month by the amount above is calculated. In this example, interest will be calculated on $240,000 for month 1, $239.333.33 in month 2, 238,666.67 in month 3, all the way to the full 360 months. The interest payable for each of these reducing figures is added and dived by 360 to give an average monthly figure. This is added to the principal repayment to provide an average monthly sum.

How Amortized Mortgages Work

With an amortized mortgage the interest on a mortgage is calculated for the full 30 years, and split into equal monthly payments. Initially, a larger proportion of your mortgage payment will be for interest, and after a point, the larger proportion will be used for repayment of the principal.

That is because the principal will drop with each payment, so the interest due will drop. Since you make the same payment each month, as the interest drops, the amount paid towards reducing the principal sum borrowed will increase.

In the example above, your mortgage payments would be around $1,439 monthly. This is at the example of 6% interest. The first repayment would include only 772.33 interest, not $12,000, making the mortgage more affordable. Towards the end of the 30 years, much more than $1,200 would be paid in interest with less to the capital.

At a lower interest rate of 3.5% the mortgage repayments would drop to £1,078. This makes the mortgage more affordable during the initial years. You will also be paying the same amount for the full 30 years. A combination of inflation and higher income makes the repayment increasingly more affordable with mortgage amortization.

Mortgage Loans: Types of Mortgage Lenders and Loan Officers

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mortgage-loan-basicsMortgage loans are available from different types of mortgage lenders. Many people are confused by the differences between types of lender, and also by the role played by loan officers. Here is a brief explanation of the parts played by those that may be involved when you apply for a mortgage.

Mortgage Brokers

Mortgage brokers do not lend money, but for many are the first person they meet in relation to their mortgage application. Brokers work with many types of mortgage lenders, and will pass your application on to the most appropriate lender for your needs. Fundamentally, a mortgage broker is the interface between you and a number of potential lenders.

For example, if you have a low credit score, a mortgage broker can place your application with lenders that specialize in that type of applicant. If you are seeking specific terms in your mortgage, or perhaps a second mortgage, then a broker will know the best company for you to deal with.

You could bypass the broker and apply for mortgage loans directly with a mortgage lender. If you do that, it might take you longer and you may not end up dealing with the lender that is most suited to your needs.

Mortgage Lenders

Mortgage lenders are the companies that actually lend you the money. They may get the actual finance from a bank, but will provide you with the application forms and the mortgage loans will be paid by them. You will pay your monthly repayments to the lender, and it is they who take the action should you fail to pay.

A mortgage broker can have a large number of mortgage lenders on its list. However, the broker does not work for any individual lender. The broker receives a commission from the lender once a client closes a mortgage. As stated above clients can deal with individual lenders personally, or use the services of a broker to get the best deal from a number of mortgage lenders.

The lenders will offer brokers mortgage loans at a lower price than to borrowers approaching them directly. You might not therefore benefit by approaching a lender rather than going through a broker. In fact you could lose out, because a broker can often find a cheaper mortgage loan for your circumstances than you could negotiate yourself.

Mortgage Bankers

Mortgage bankers finance mortgage loans with their own money. A lender can pass a loan onto a mortgage banker to finance. The banker can service the mortgage itself or can sell it on to Fannie Mae, Freddie Mac or other investors. Most mortgage lenders are also bankers.

Mortgage Loans and Loan Officers

Loan officers are employed by mortgage lenders and banks. They have a deep knowledge of the different types of mortgages and other loans offered by the lending institution they work for. A loan officer will work with the applicant to arrive at the best mortgage package for that person.

Loan officers are particularly useful where the applicant has an adverse credit record, or is not old enough yet to have developed a proper credit history. They know how to deal with problem cases and extenuating circumstances, and are able to find the best suitable mortgage loans that the lender they work for can offer.

In the course of applying for mortgage loans, it is possible that you will deal with each of the above. You should at least come across two: either a mortgage broker or lender, and the loan officer.

Joint Mortgage and Joint Ownership: Which is the Better?

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joint-mortgage-basicsA joint mortgage means nothing more than that two people are sharing the responsibility for paying the mortgage loan. Both names are included on the loan agreement, and both are equally responsible for ensuring that the mortgage loan is repaid as contracted.  It does not infer that each has a share in the ownership of the property.

For example, you could have a parent help you to purchase your home by agreeing to have their name stated on a joint mortgage. This gives added security to the lender, and will enable the parent’s income to be considered when the total sum you can borrow is agreed. Without the joint mortgage you would have had to purchase a cheaper property.

Joint Mortgage and Joint Ownership Are Not the Same

So Joint Mortgage and Ownership are not the same. The discussion is between a joint mortgage where the risk is shared, and joint ownership, where each party involved in the risk also owns their share of the property. You would think the latter arrangement would be best, but not always.

Sometimes it is not best for ownership of the real estate to be legally shared. One example of this is where a parent has helped a couple to purchase their first home.  Although a joint mortgage would be necessary for this to happen, it would be crass for the parent to then insist on owning a share of the marital home.

Even if ownership has been agreed to be shared, there are options as to the way in which it is shared. There are two basic options you should consider when coming to a joint ownership agreement. You can make the passing on of ownership to your partner automatic on your death, or make it clear in your will to whom ownership should go.

Joint Ownership Agreements

Joint Tenancy Agreement:  There are some legal aspects of joint ownership that should be considered. This can be arranged in two ways. One is Joint Tenancy, where the property is jointly owned and the survivor assumes sole ownership in the event of the other partner’s death. This is the best arrangement for married couples, and should be set up when the mortgage is arranged. It guarantees the survivor to take sole ownership of the property.

Tenants in Common: The other is known as Tenants in Common, where each partner owns an equal share of their home. They can leave that share to whoever they wish in their will. In event of a death, sole ownership would have to be established in probate court. It is feasible in this case for one partner or even both to leave their share in the property to a third party in their will.

Leaving the Mortgage Agreement

It is normally not possible for either partner to leave the mortgage agreement. Both are legally responsible for repaying the mortgage loan. Even if they agree between them, the lender will likely not agree unless they are certain the remaining person has the wherewithal to make the combined payment. Only if the loan is assumable can this be carried out by right, and even then only if the remaining debtor is able to prove continued ability to pay.

Joint Mortgage Vs Joint Ownership: Summary

This is not a choice, and hence not a valid comparison. Joint mortgage and joint ownership are not options as such. You can have one without the other. Two people can jointly pay a mortgage on a home that only one of them owns.  Likewise two people can be legal owners of a home, the mortgage for which only one of them pays.

If this seems confusing, a mortgage professional can help make things clear.  It is essential that you understand these terms before entering into any one of them. You don’t want to find yourself paying equally for a mortgage on a home for which you have no ownership rights – unless it is for your son or daughter!

Moving With Children – How to Make Moving Easy

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It is important that you make moving easy on your children. If you find moving home stressful, as most adults do, then what is it doing to your kids? They are having to leave all their friends, leave their sports teams, settle into a new school and  perhaps have to fit into a neighborhood where the kids already have their own groups of friends and allegiances and yet your children have no say in the matter!

You won’t remove the stress that all this will cause them, but you can help to reduce it by keeping them involved every step of the way. By doing this, you will also relieve some of the stress on yourself, because their distress will also upset you. Here are some tips on alleviating some problems connected with moving home and children.

Talk to Them

If you want to make moving easy, then talk to your kids and explain what is happening.  Give them plenty notice so they can tell their friends and make arrangements to talk on Facebook, IM them or even talk by video on Skype. Your children will tend to focus totally on what they will be losing, since in their eyes they are gaining nothing.

moving-with-childrenYou can tell them that they can choose how to decorate their own rooms – get them actively involved in discussing colors and wall coverings. Perhaps even furniture if you are buying new furniture for their bedrooms.

That is one way to get them more relaxed about the move if you have the money – let them become involved in what bedroom furniture they can have: a sofa bed could enable them to have sleepovers – maybe their friends could visit during a vacation or even a weekend.

Age Matters

The way your children react to a move will be different according to their age. Pre-school children tend to accept moving from their regular neighborhood better than older kids. Their security lies in their parents, and they are happy living where mom or dad is.

Their security also lies in what they know, so let them keep the old bed and other furniture that they are used to. You might be able to keep a 12 year-old reasonably happy with new furniture but not a 4 year-old. Young children like constancy in their environment

Once they reach school age it is more difficult because they are going to lose their school friends.  Rather than move during the school year, it is best to wait until towards the end of the summer vacation. They can then say goodbye and make contact arrangements, and after the move they can go straight to their new school and meet new people.

Moving Home with Teenagers

If you have teenage children, you may have a specific problem. They won’t be happy at the best of times, but if they have formed an attraction to a young person at school then they may be adamant about not moving.

Put yourself in their situation – when you were young and had a crush on this young guy or girl at school would you be happy to be told you had to leave the area? Particularly if your feelings were reciprocated? There is no easy solution to this and the best thing you can do is discuss it with them.

Saying ‘get used to the idea’ will alienate them from you. You should try to come to a solution that is acceptable both to your teenage children and to you. Perhaps you will get them video Skype, or maybe let them visit their friends now and again.  Ultimately, they will meet new friends and the old ones will become a memory.

Finally. . .

There is plenty you can do to make moving home easier for your children, and a great deal depends on your understanding their problems – or being seen to try. Do not ignore their issues, but discuss them and be completely honest at all times. Children ultimately get used to the idea, particularly if they can find new friends quickly. However, the older they are the greater the possibility of it being an issue – just be aware of that and be prepared for it.

Caring for Indoor Plants: Increase the Value of Your Home

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You can increase the value of your home by caring for indoor plants. Nobody deliberately neglects or kills their houseplants, but many people fail to keep them healthy through ignorance or a lack of knowledge of their worth to the perceived value of their home.

Indoor plants can be a significant factor in staging a home.  The welcome your home gives to visitors can make a good first impression (and you know what they say about these!).  Healthy and attractive houseplants contribute to that WOW factor that can make the difference between a sale or not – or even between $300,000 and $250,000!

home-staging-flowersHouse plants can significantly improve the look and feel of your home as you show it to prospective buyers.

Water Them – Don’t Drown Them!

Plants are just like you – they need a drink now and again, but can drown if immersed in too much water. Get to know the natural environment of your indoor plants – cacti don’t do well in floods and African violets don’t grow in the desert!  That’s basic stuff, but even if you know that, how about the container?

The same plant will need more watering in a smaller or shallower pot then in a larger or deeper equivalent. You must consider evaporation rates, and keep the soil moist for plants that thrive in such conditions. If you get in some plants to help increase the value of your home, they could wilt and even die before the property is sold unless properly cared for – just as you would if you were starved, drowned or overheated.

Know their Natural Habitat

You don’t even have to kill them. Caring for indoor plants involves understanding a particular plants’ natural habitat. Plants can appear healthy, but refuse to flower or the flower wilts and falls off just as your potential buyers ring the door bell!

Examples are carnivorous plants such as the Venus fly trap, pitcher plant or sundew.  They appear exotic and are good conversation pieces, even with potential buyers.  However, if you add fertilizer to the soil you will kill them! Another way to kill them is to use tap water: carnivorous plants need to be kept moist using distilled or deionized water. Know your plants!

Don’t Bake Them or Blind Them!

Plants do not like radiators!  Even a cactus will die if you sit it too close to a radiator or heating duct. For some, even sitting in a window in summertime Arizona will be too much. It’s not just water evaporation, but the effect of heat on the plant’s cells.

Many plants do not like being kept in the dark, and some even dislike artificial light. Light consists of a range of visible light wavelengths, and many plants require those that are present in natural sunlight, rather than in a spotlight or mercury vapor lamp. Killing off your plants just before your visitors appear to view your home is a bad sales move!

These are just some of the factors involved in caring for indoor plants. Houseplants can increase the value of your home, but if not cared for they can also help ruin the sale! Generally plants make a home look more appealing, so make sure that you know how to care for your houseplants. Staging a home with indoor plants can make you a few thousand extra on your sale.

Mike Lesmeister Discusses Qualified Mortgage Rule on Houston Real Estate Radio

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Accidental Landlords and Income Tax: Depreciation and Other Claims

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Landlord Basics: Tax DepreciationAccidental landlords are those that find themselves in a situation where they are forced to rent out their home. Fundamentally, they cannot pay the mortgage but are unable to sell, so must either be foreclosed, sell cheaply at a significant loss or rent it out and move to cheaper housing. If you have found yourself in this situation, you must pay tax on your rental income, but  there may also be some other tax implications that you can work to your benefit.

Your cash flow improves because you are paying out less, and your rental income at least pays the original mortgage. You can sell your home later when prices rise, and meantime your credit record is unaffected. How does this affect your income tax situation?

Like all accidental landlords,  you are taxed on your rental income. You must declare that when you file your taxes for that year. To do that you will have to include an IRS Schedule E Form 1040 (Supplemental Income and Loss from Rental Real Estate).

Accidental Landlords:  Income Tax Deductions

However, accidental landlords  can also make some deductions against their tax liability, and you do that on the same form.  All expenses involved in making the real estate suitable for rental can be claimed. Examples of deductible expenses are:

•    Mortgage interest on the property.
•    Property tax.
•    Repairs and maintenance.
•    Landscaping fees.
•    Cost of any furniture or appliances included in the rental.
•    Household insurance.
•    HOA fees – you can deduct these because you are renting rather than residing in the property.
•    Any Letting Agency fees.
•    Depreciation.
•    Any other expenses you incur through renting the house.

Deduct the total of these expenses from your rental income for the year.  The result will be the net profit or loss you gain or incur through renting the property. If your expenses exceed the total rental you are paid, then you will have made a loss for that year.

Calculating Depreciation

The depreciation of your rented real estate could be a high sum, and will help significantly in reducing your accidental landlord income tax liability. It is based upon the price you paid for the property and not on its current value. You are advised to seek the help of a professional tax or mortgage adviser to calculate the depreciation.

Fundamentally, you add any capital improvements made to your home to the initial sum paid when you purchased it. This figure is known as your taxable basis. Then deduct the value of the land from that to get the building value which you then divide by 27.5 years to arrive at the depreciation figure. You then add that to the Schedule E as an expense, just as you do the others, some of which are listed above.

It is quite common for the expenses of accidental landlords to exceed their rental income. In this case you will be able to reduce your overall income tax liability, and could get a reasonable tax refund depending on the amount by which your rental expenses including depreciation exceed your rental income. This does not necessarily mean you are making a loss on the deal, because depreciation will be a large part of that difference.

Be Aware Of. . .

Using the property yourself in the same year you changed it to rental use.  This will negate your depreciation claim for the entire year.

Renting only part of the property. In this case you can claim only that proportion of the total space that is rented.  So if you rent out only one room at 350 sq. ft. in a property of 2200 sq. ft. then you can claim only 15.9% of the expenses, including only 15.9% of the depreciation.


The upshot is that accidental landlords should keep receipts for every cent they have spent on your property while preparing it for rental and maintaining it after renting it out. Be fully aware of all expenses and also of the amount of depreciation you are entitled to claim.  Use the experience and knowledge of a real estate professional to help you with this and with completing the Schedule E form correctly.

Accidental landlords can save a great deal on their income tax liability if they are fully aware of their entitlements and how to avoid negating any of them. Make full use of your allowable tax deductions, but be certain you can prove your entitlement. Becoming an accidental landlord can help you keep your home, avoid a drop in credit rating and help you to reduce your income tax liability. If you need help in achieving this then get it. Don’t trust to luck!

The FHA 203(k) Loan Program: Mortgages for Distressed Homes

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fha-203k-basicsThe FHA 203(k) loan program is an ideal platform to receive mortgages for distressed homes. If you have a new home in mind, but it requires a great deal of renovation, a 203(k) mortgage would be ideal for you. First, let’s discuss what the term means, and then how it would help you to save money and a great deal of time and effort.

What is the FHA 203(k) Loan?

The FHA 203(k)  loan program enables you to purchase, modernize and remodel real estate in poor condition with the one loan. Such mortgage loans are mainly, but not exclusively, intended for foreclosed and distressed properties. They are designed to enable home buyers to renovate properties in poor condition with just one finance application.

Prior to this, you would have had to apply for a mortgage to purchase the property. Having made the purchase, you would then have to apply for a further loan for the repairs and improvements.  Under the terms of the FHA 203(k) mortgage loan program, you can be offered one fixed or adjustable rate mortgage to cover the cost of the purchase and the improvements.

Problems With Distressed Properties

Mortgages for distressed homes are generally no different to those for well maintained homes. There are two problems with this:

a) Most people would rather purchase a home that they can immediately live in without the need for extra work, and

b) Most people would rather not be faced with the cost of repairs or renovation immediately after paying their deposit and closing fees.

Even if you came across a distressed property at an excellent price, could you afford the costs of the purchase and then the costs of renovation on top of that? Such costs can reach tens of thousands of dollars.

Because of this, it became apparent that many such properties were lying unoccupied and simply rotting away. The 4203(k) loan program enables buyers to amalgamate the estimated cost of repairs and renovation into the original mortgage loan.

203(k) Loan Program Qualification Guidelines

This type of mortgage seems to offer a good deal, and a fabulous opportunity for you to purchase a distressed home at a low price and include the modernization costs into your mortgage loan. What’s the catch?

There is no catch, but you must qualify. The property must be occupied by the owner, so you cannot get such a mortgage for a second or holiday home. It must also have been standing for at least one year. You can use the mortgage to add extra rooms or family units, and can even use it to rebuild from existing foundations.

In order to qualify for a 203(k) loan program, you must also qualify under the FHA guidelines. In other words, if you cannot get an FHA loan, then you cannot get a 203(k) mortgage. Full guidelines are available on the U.S. Department of Housing and Urban Development (HUD) website.

Houston Housing Market Remains Tight Mortgage Pre-Approval Key

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Houston Home Sales RisingThe Houston housing market continued to rise last month as the Houston Association of Realtors reported that home sales rose 8.3 percent year-over-year, with February single-family home sales totaling 4,765 homes sold in February. This represents the 33rd consecutive month of rising home sales and a larger one-month volume of home sales than the market experienced in January. The average price of a single-family home increased 12.5 percent year-over-year to $247,534. The median price—the figure at which half the homes sold for more and half for less—rose 11.7 percent to $181,500. Both represent a record for home prices in the Houston area for February.

The supply of homes has held at 2.6 months of inventory since December, however that is down compared to the 3.6-month supply in February 2013 and dramatically lower than the national figure of 4.9 months of inventory. A healthy balance between supply and demand is typically represented by a 6 month supply of inventory. This dwindling inventory has been a driver of home prices in the area and has led to a “seller’s market” where homes in high demand areas of Houston such as The Woodlands, Spring, Tomball, Cypress, and Conroe often go under contract within days of listing. Multiple offer situations are also becoming increasingly common in these high growth areas.

Homebuyers should be prepared when embarking on their home search by following the steps below:

  • Get pre-approved for a mortgage from a reputable lender; one who has reviewed all of your income, asset, and employment documents
  • Be prepared to make an offer right away – thinking about whether to move forward for a few days will likely mean losing the house you want
  • Make your offer a strong one – making a low-ball offer or requesting significant seller contributions will make your offer pale in comparison to others
  • Don’t wait – mortgage rates have risen from their lows of 18 months ago and home prices are rising, waiting another year to buy a home will likely mean a higher price and higher rate


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