Interest-only real estate loans give borrowers extra savings

Additional principal payment reduces following month's payment
By: Jack Guttentag: Inman News
"I am looking for a loan on which, whenever I make an extra principal payment, my monthly payment immediately declines. Is there such a thing?"

The only mortgage that works that way is one on which the payment is interest-only. Not all interest-only mortgages work that way, however.

With a fixed-rate mortgage of the standard type, extra payments shorten the payoff period but do not affect the monthly payment. For example, if you borrow $100,000 for 30 years at 6 percent, your fully amortizing payment is $599.56. Pay this amount every month, and you are out of debt after making 360 payments. If you make an extra payment of $90,000 in month 2, your payment in month 3 and all subsequent months remains $599.56 until month 20, when the loan balance hits zero. Until then, you receive no payment relief.

With an adjustable-rate mortgage (ARM) on which the borrower is making the fully amortizing payment, extra payments do change the monthly payment, but not until the next rate adjustment. At that point, the payment is recalculated and the new payment will reflect all prior reductions in the balance.

Assume the $100,000 6 percent loan is a one-year ARM, and that an extra payment of $90,000 is made in month 2. The payment would remain at $599.56 through month 12, but (assuming the rate stayed at 6 percent) the payment would drop to $13.81 in month 13.

On ARMs with longer initial rate periods, the drop in payment following an extra payment would be further delayed. On the popular 5-year ARM, for example, the payment wouldn't drop until month 61.

If a loan is interest-only, the payment should decline in the month following an extra payment, whether the loan is fixed-rate or adjustable-rate. The interest only payment on the $100,000 loan at 6 percent is $500. Following the payment of $90,000 in month 2, the interest-only payment should drop to $50 in month 3.

From the mail I have received on this topic, however, I get the distinct impression that not all lenders have their servicing systems geared to do this properly. This is not surprising, given the haste with which many lenders have incorporated interest-only into their program offerings. Even if the system calculated the new interest-only payment correctly, they need to communicate the new interest-only payment to the borrower. I have not done a comprehensive survey, but I do know that some lenders are not doing this.

In most cases, lenders who do not change the payment immediately will change it on the anniversary month, as specified in the note. Until that date, the payment will remain unchanged, but since the interest due is lower, a part of the payment will be credited to principal.

If the loan in my example is of this type, the interest due in month 3 will drop to $50, but the borrower will continue to pay $500 until month 13, which is the anniversary month. $450 will be applied to principal in month 3. In each subsequent month 4-12, the interest portion will drop a little and the principal portion will rise, until month 13, when the borrower will once again be able to pay interest only.

There are some interest-only loans on which the interest-only payment in month 1 continues until the end of the interest-only period – five or 10 years.

If it is an ARM, the payment will adjust when the rate adjusts, but if it is fixed-rate, the payment won't change for five or 10 years.

If you are contemplating an interest-only loan and find immediate payment adjustments in response to extra payments a highly desirable feature, ask about it. Don't expect the subject to be volunteered by the loan officer or mortgage broker. They are not involved in loan servicing and the chances are that they don't know the answer and will have to ask. Make sure they do.

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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Home makeover craze hits the garage

By: Katherine Salant: Inman News
Over the last 20 years every room in a typical suburban house has been transformed to some degree.

The only one to escape home builders' attention has been the garage, but the enterprising folks at Whirlpool and Sears now offer you the opportunity to organize it, accessorize it, or go the whole nine yards and undertake a complete maker-over. After a recent fact-finding trip to my local Sears store, I concluded that there is now a solution to nearly every garage gripe you could imagine. Moreover, these solutions are projects that any homeowner can undertake and, carried to their most extreme, won't cost more than about $3,400.

The easiest project offers the most immediate gratification because it will bring order out of chaos. You can gather up the jumble of unpacked boxes, sports equipment, and gardening tools that make every arrival and departure from your otherwise perfect new house so unsettling and put them on easy-to-assemble shelving units.

Durashelf 's $45, 36-inch-long plastic shelving system holds 150 pounds per shelf. Should you have a lot of really heavy items, say an engine block or many boxes crammed with books, Do+Able's $65, 36-inch-long shelving system holds an astounding 1,000 pounds per shelf. Both units are 18-inches deep. In most garages, they will easily fit on the side wall of a parking bay and still leave enough room to get in and out of your car.

Moving from stuff to food stuffs and bulk-purchase grocery shopping, the next garage gripe on your list may be the old refrigerator you have in there that runs all the time, costs a fortune to operate and doesn't work well. In this case the problem is not your refrigerator, it's where you put it ? an unconditioned space. Whirlpool has a solution ? a refrigerator and freezer that is designed to function in a garage.

Unbeknownst to most consumers, Whirlpool refrigeration engineer Travis Perkins explained, a standard refrigerator is designed to operate in the 55 to 100 degree range of your interior conditioned space, not the extreme temperatures of your unheated, un-air conditioned garage where the mercury can go as low as 0 degrees or as high as 110 degrees.

While most people might suspect that a refrigerator wouldn't work well at 0 degrees, its performance begins to decline when room temperature falls below 50 degrees, Perkins said. At 40 degrees a refrigerator's thermostat stops signaling the unit to turn on, and the freezer also shuts off because it only runs when the refrigerator does. After a few days of 40-degree weather, the frozen food will begin to thaw and spoil. In many parts of the country, this situation will prevail all winter if your garage is attached because the space will capture some of the heat from your house and the temperature will never fall below freezing.

Should the temperature of your garage eventually fall below 25 degrees, food in the freezer will remain frozen, but items in the refrigerator will also freeze. At the other extreme, when the temperature soars over 100, the refrigerator goes into "overdrive," constantly running to keep food chilled and frozen, but not adequately. A typical symptom of this condition is softened ice cream, Perkins said.

A refrigerator that works well in a typical garage situation is no small feat of engineering, and its manufacture is expensive, said Perkins. Whirlpool's 19-cubic-foot Chillerator (a refrigerator with a small freezer on top) is $1,000, and its Freezerator (a 21-cubic-foot unit with a freezer below and a smaller unit on top that can be either a refrigerator or a freezer) is $1,100. Whirlpool also makes a small $450 Beer Box that holds 35 12-ounce cans of soda or beer. All three are on casters, and the small one fits under a workbench.

Segueing from the practical to serious makeover, both Sears and Whirlpool offer a workstation ensemble that will make a garage work area look coordinated and finished instead of like a handy man's hodge-podge. Sears' Craftsman Professional and Whirlpool's Gladiator include a workbench, and steel cabinetry ? a 5-drawer base and a base cabinet on casters that you can move right next to your car when you're working on it (otherwise both base units fit neatly under the workbench), a tall, standing cabinet, and wall cabinets. Another plus with both systems ? the wall cabinets can be easily attached and detached, making the entire ensemble portable and easy to stow on a moving van, should you relocate at some point in the future. The crowning touch: plastic floor tiles or plastic roll flooring that make the space look and feel like a room and not a garage.

Not being one to spend any time at a workbench myself, I invited three Ann Arbor, Mich., friends with expertise in this area to evaluate the Sears Professional and Whirlpool Gladiator products: Greg George, a carpenter/remodeler; Dick Vail, a professional handyman/mechanical engineer/remodeler; and Ernie Weaver, an auto mechanic/wood working hobbyist.

My team's conclusion: for the weekend auto mechanic or the person who likes to build or repair small things (for example, fix a lamp or help with a child's science project), the system will work well. For the serious woodworker, the workbench and storage units are not big enough. Woodworking tools are bigger than auto repair tools and would not fit easily into either 5-drawer base unit. If you routinely use large pieces of wood (to make furniture or repair a door, for example), you need a much bigger, freestanding workbench. Another downside of woodworking that can make it an unacceptable garage activity regardless of any particulars is the sawdust that gets all over everything. The floor tiles looks nice, but practically speaking, the only spot where they are sensible is right in front of the workbench, if you anticipate standing for long periods.

The main differences between the Sears Craftsman Professional and the Whirlpool Gladiator ensembles are aesthetics and price. Both are tastefully designed in a monochromatic combination of metallic grey, black and silver. Sears' cabinetry features rounded edges and catchy rubber drawer pulls that look like car door handles. The rounded "zero-edge" corners on all the cabinetry make it easy to open the doors, even when the unit is next to a wall, and the cabinet doors have shallow shelves for storing small items. The workbench surface is sealed MDF board, which is easily cleaned if auto grease gets on it.

Gladiator's silver cabinet doors and drawer fronts feature a raised tread plate pattern that adds a masculine touch. The doors are inset and also easy to open if the unit is next to a wall. The workbench surface is maple butcher block, which may seem inappropriate for a garage workstation, but Weaver, a professional auto mechanic, said, "If it gets dirty, it looks like you're doing something."

Couching the aesthetic choices in terms of cars, Weaver and I agreed that the rounded look of the Sears Professional workstation would likely appeal to the owner of a Chrysler PT Cruiser or Pacifica, while the squared off Gladiator look would be more appealing to the owner of a more traditional-looking car like a BMW sedan or a Volvo station wagon.

The cost of the two workstation ensemble systems with an 8-foot workbench differs by $313; the total for the Gladiator is $2,273, for the Craftsman Professional $1,860. This price includes a 3-foot-wide tile floor in front of the workstation. A Whirlpool Chillerator and 2 Do+Able shelf storage units would add another $1,130. These prices are all "manufacturers suggested retail prices," but the garage storage systems market is very competitive and markdowns are common.

A final tip: before you get very far with your garage makeover in your new house, make sure that the system will fit. Mark Marymee of Pulte Homes said their average size two-car garage is 21 feet by 21 feet. Leaving 1 foot between the rear of your car and the garage door, you would have about 3 feet between the front of your car and the workbench if your car is the size of a Ford Focus station wagon, 2 feet if it's the size of a Ford Explorer or a Ford Taurus, 15 inches if it's the size of a Ford minivan, but only 3 or 4 inches if its as big as a Ford Crown Victoria.

For more information:
Whirlpool's Gladiator Garage Works: www.GladiatorGW.com
Sears' Craftsman Professional garage work station: www.Sears.com; on the home-page search feature, first click on tools, then write in "garage storage"
Questions or queries? Katherine Salant can be contacted at www.katherinesalant.com.
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New rule protects consumer info from Dumpster diving

Real estate finance companies must safely dispose of personal data
By: Janis Mara: Inman News
Three years ago, an identity thief jumped into a filthy Dumpster behind a Washington, D.C., pizza place and stole Ray Everett-Church's credit card number from the pizza joint's discarded receipts.

In every consumer's worst nightmare, the thief used the card to buy $800 worth of watches from a Web site.

Though Everett-Church was able to set the matter straight before further damage was done, the process consumed hours of his time. His experience demonstrates the reasons behind a new federal rule mandating that businesses destroy customers' personal information before tossing it out.

The disposal rule of the Fair and Accurate Credit Transactions Act of 2003, or FACTA, goes into effect June 1. It mandates that anyone who has personal information from consumer credit reports must properly dispose of such material to protect against unauthorized access to the material.

Consumer concern over identity theft has skyrocketed in the wake of scandals over information theft from ChoicePoint and LexisNexis, among others. The new rule, which is just one part of FACTA, is specifically directed at businesses and individuals who obtain information from consumer credit reports, according to Dennis Kiker, an attorney at Moran Kiker Brown, PC.

"If the information comes from a credit report, it is covered by the rule. In the real estate and mortgage industries, particularly the mortgage side, that information often will be entered into another system," Kiker pointed out. Any information taken from a credit report, such as Social Security numbers, is covered, the attorney said.

In most instances, properly disposing of consumer information means shredding paper records containing information from credit reports or the credit reports themselves, and wiping computers clean of such data, Kiker said.

"The paper part is easy. If it's paper, you shred it," said Kiker, who specializes in litigation management, including document management programs.

The best way for a large-scale operation to shred paper is by hiring an outside company to do it, Kiker said. That way, as long as the information is identified as being affected by the FACTA rule, "if it gets out after leaving your hands, it's their (the outside company's) responsibility."

A sole proprietor or small company can just use a shredder from Home Depot or another store, he added.

With electronic data, sole proprietors and small companies can buy a software utility to clean the computer's hard drive, Kiker said. "Put consumer-identifying information in specific places, as simple as folders in Windows, and use software to eliminate that data."

In larger companies, the Information Technology department will dispose of the information, Kiker said. "For the big companies, it's understanding what the FACTA obligation is and taking care of it. This needs to be a part of an overall document retention policy. There needs to be someone responsible for implementing the policy and someone responsible for auditing it."

Generally, this is a good practice anyway, Kiker said.

"If a situation arises, the company needs to be able to demonstrate what they did to destroy the information. As long as they have made a good faith effort to eliminate it, they are very unlikely to result in any liability," Kiker said.

Generally, willful violation of the requirements can result in actual damages, or damages of not less than $100 nor more than $1,000, plus costs of the action, including attorneys' fees, the attorney said. Liability for negligent violation is limited to actual damages and the costs of the action, including attorneys' fees.

"It's not just the money," said Tena Friery, research director for the Privacy Rights Clearinghouse. "There is a tremendous amount of bad publicity associated with a breach. There was a case last week of medical records falling off a truck and scattering over the highway. The hospital will probably recover, but a mortgage broker who loses the faith of clients is another matter altogether."

Eventual financial losses to a company because of a damaged reputation can be enormous, Friery said. "ChoicePoint's reputation is really tanked," she said, referring to the scandals over data theft from the company.

With regard to the new rule, Everett-Church said, "In this day of rampant identity theft, what mortgage broker and real estate agent isn't already securely disposing of records containing deeply personal data?"

Everett-Church, who is himself a privacy expert, said, "I've witnessed people climbing into a Dumpster ankle-deep in half-drunk coffee behind my local Starbucks looking for credit card receipts. Anyone who doubts that data thieves haven't identified the offices of mortgage brokers, loan processors, settlement agents and anybody else with a goldmine of financial information in its Dumpster really has no concept of what's going on out there."

Friery and Kiker agreed that adhering to a set of security procedures shouldn't be anything new for mortgage brokerages. Kiker said most big companies are already sophisticated about safeguarding consumer-identifying information.

"The key is knowing if your document-retaining policies do address the FACTA rule and are being followed," Kiker said. "My experience is most big companies have good policies with regard to paper records, but often don't have policies for electronic data. The FACTA rule should be a component of every company's paper and electronic disposal policies."
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Simple home remodeling tricks

Molding provides simple options
By: Paul Bianchina: Inman News
If spring is the time for you to be thinking about selling your home, or even if you just think it's in need of a few simple new touches, you might be looking around for some inexpensive fix-up ideas.

One quick and easy approach is to remodel with moldings.

There are dozens upon dozens of stock molding patterns on the market, in a variety of paint-and stain-grade materials to match any décor and any budget. Use them alone, or combine two or more of them to give you a virtually endless selection. Here are a few ideas:

Doors
You can do a lot to dress up plain doors, including cabinet doors, with the application of some moldings. For full-size doors, you can utilize larger moldings such as casings and base, while narrower-profile moldings such as screen bead, half-round, and scribe-moldings are more suited for smaller doors such as cabinets.

Begin by laying the door flat on a table or a pair of sawhorses. Experiment with different designs by simply laying the moldings on the door in a variety of patterns until you find the right look, then measure the layout and sketch it on a piece of paper to make it easier to duplicate on other doors.

Measure the layout carefully on the door, and mark the locations using a straightedge and sharp pencil. Take your time - this is finish carpentry, and getting things crooked or unequally spaced will really show up. Cut the moldings as necessary using a power miter saw equipped with a fine-tooth molding blade, then attach them using wood glue and fine brads.

Walls
Almost any plain wall can benefit from a simple chair rail. This can be any type of trim material, from solid 1-by-4 stock to intricately carved chair rail moldings. The molding is placed horizontally on the wall, typically about 36 inches from the floor. Attach the molding to the wall using finish nails driven into the studs. Chair rails can be painted the same color as the walls, or painted or stained a contrasting color for greater definition - experiment with a few pieces of scrap before doing the entire room. Also, you'll find it much easier to lay all the moldings out on sawhorses and pre-paint or stain them before installation.

Another wall trick is to use moldings assembled into squares and placed at regular intervals along the wall, creating a paneled look. One method is to use 1-by-4 stock vertically every three to four feet, to a height of 36 inches off the floor. A horizontal 1-by-4, similar to the chair rail idea, runs across the tops of the vertical members, creating a regular series of square recesses. Smaller moldings can be used inside the larger squares to enhance the paneled look.

Here again, you'll want to experiment with a few different materials and layouts before deciding on exactly what you want to do. After deciding on the pattern, layout the design one the wall very carefully, adjusting the size of the squares as necessary to achieve a regular pattern of spacing - you don't want to end up with one square at the end of the wall that's larger or smaller than all the rest!

Ceilings
Ceilings are an often overlooked area where a few molding tricks can make a dramatic difference. For example, you can install a decorative molding such as a base or chair rail around the perimeter of the room, attached flat against the ceiling and spaced about four to six inches in from the walls. Paint or stain the moldings to either match or contrast with the ceiling, and you'll really dress up an otherwise bland area.

Finding the materials
Every lumber yard and home center carries a selection of standard molding patterns, usually in stain-grade materials such as oak and clear fir, and paint-grades materials of finger-jointed hemlock and medium-density fiberboard (MDF). Most yards have either a sample board or a chart that shows all of the different patterns and sizes available - even if they don't stock it, they can order it for you.

When you find something you like, just buy one or two pieces to experiment with. You may even find a couple of short ends or broken pieces that you can buy at a discounted price.

Remodeling and repair questions? E-mail Paul at paul2887@direcway.com.
Copyright 2005 Inman News
Distributed by Inman News
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Paying Off Mortgage May Not Be Best Move

Homeowners with extra cash should think twice before repaying their mortgages early. If they eliminate their loan, they can't take advantage of tax-deductible interest, which typically surpasses the standard deduction. They also will lose the equity benefits associated with rising property prices. However, other investments are more liquid than real estate, enabling them to cash in quickly when they need money.
Consumers must compare their mortgage returns, which are equivalent to the interest rate, with other investments in order to determine the course that best fits their needs. Many homeowners who repay their mortgages use the freed-up cash to purchase other properties, but experts urge them to proceed with caution. Higher interest rates and a slowdown in price appreciation may indicate an unfavorable climate for real estate investments. For those nearing retirement and the end of their mortgage terms, however, as well as those whose investments of choice are bank CDs and low-yielding bonds, repaying a mortgage ahead of time may be a viable option.
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The Weekend Guide! April 21-24, 2005

The Weekend Guide for April 21-24,2005.
Full Article:
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Homeownership Tax Credit Bill Introduced

The NATIONAL ASSOCIATION OF REALTORS® praised U.S. Sens. Rick Santorum (R-Penn.), John Kerry (D-Mass.), and four other senators of both parties for introducing in the U.S. Senate this week the Community Development Homeownership Tax Credit Act (S. 859), which can help as many as 50,000 families a year achieve the American dream of homeownership. Companion legislation known as the Renewing the Dream Tax Credit Act (H.R. 1549) was introduced in the U.S. House of Representatives last week by U.S. Reps. Tom Reynolds (R-N.Y.) and Ben Cardin (D-Md.). Modeled after the Low-Income Housing Tax Credit, the latest legislation is expected to generate nearly $2 billion in private investment annually for the construction and/or rehabilitation of approximately 50,000 homes for sale to lower-income families. The credit also is expected to produce 122,000 construction and related jobs, $4 billion in wages, and $2 billion in federal, state, and local tax revenue. The program would provide investors with a tax credit of up to 50 percent of the cost of developing each home. The bill is similar to legislation that was introduced in both the House and Senate last session and gained the support of a bipartisan majority of Congress. The homeownership tax credit also enjoys the strong support of President Bush. NAR is part of a coalition of more than 40 housing and community organizations that back the measure. “The homeownership tax credit will help thousands of families a year purchase a home by bridging the gap between the development cost and the price at which these homes can be sold in many lower-income communities,” says NAR President Al Mansell, CEO of Coldwell Banker Residential Brokerage in Salt Lake City. “As REALTORS®, we’re committed to helping every family achieve the American dream of homeownership," Mansell says. "We look forward to working with Congress and the administration to enact homeownership tax credit legislation this year.”
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Older Homes Have More Wiring Worries

Homes that are more than two decades old could have electrical problems, leading to power failures, fires, or electrical shocks. Worn wiring, overused extension cords, and inadequate circuits are the most common problems, according to the Copper Development Association.

However, there are several other defects that could be uncovered by licensed electricians. Wiring that is too small for electricity to flow freely, for example, can get too hot and start fires. The problem is exacerbated in attic areas, so homeowners would be wise to ensure that wiring in that space is large in diameter.

Owners of homes with aluminum wires, which are more brittle and corrosive than copper wires, can either completely rewire the residence or, as a much more affordable alternative, attach copper wire near outlets and switches.

Additionally, they should make sure fuses are of the appropriate rating and consider installing ground fault circuit interrupters (GFCI) and arc fault circuit interrupters (AFCI). GFCIs minimize the risk of electric shock in kitchens, bathrooms, and other moist spaces; while AFCIs safeguard against fires caused by arcs in worn cords.
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Spice up your home with a few paint tricks

Whether it's sponging or ragging, new techniques give a fresh look
By: Paul Bianchina: Inman News
You've seen them do it on shows like "Trading Spaces" and "Extreme Makeover." You may have even seen it at a friend's house. And now you've decided it's time to move away from those plain white walls and try something different. With some basic tools, a couple of cans of paint, and a little experimental spirit, you can dress up one wall or your entire house with some simple special painting effects.

The materials listed here should all be available at home centers, paint stores and larger department stores. With any of these techniques, you might want to practice in a closet or on a large sheet of cardboard or plywood first, to get a feel for the process and to see if you're happy with the color and texture. Also, your hands will be getting up close and personal with the paint, so a couple of pairs of disposable gloves are also a worthwhile investment.

Sponging

Sponging is probably one of the most popular and most enjoyable of the special effects painting techniques. To get started, you need two or more colors of paint, a paint tray, a natural sea sponge and some paper towels or old newspapers.

To begin, paint the wall with the base color. This will actually not be the predominate color when you're done, but rather more of an accent color that shows through gaps in the sponged-on color. Let this coat dry before proceeding.

Next, dip your sponge in water and ring it out so that it's just damp, which helps keep the sponge from picking up too much paint. Dip the sponge into the second paint color, blot it slightly against the paper towel to remove excess paint, and then gently press the sponge against the wall. Keep your touch light to create a subtle pattern of paint, as opposed to pressing hard or with too much paint on the sponge, with blurs the pattern too much.

Don't overdo it by trying to cover too much of the base coat at once. Instead, try and achieve a light pattern of paint texture that has a look you like. Do the entire wall, and then if you feel that too much of the base coat is still visible, you can go back over it a second time. Allow this second color to dry completely before going back over it with a third color if desired. If the sponge will not reach into the corners, use a small paint brush to dab paint into these areas in a pattern that matches the sponge.

Ragging

Ragging is similar to sponging in technique, but the finished look is different, with a slightly heavier look that resembles some types of fabric. Once again, begin by applying a base coat color to the wall and allowing it to dry completely. You'll want to use a clean, absorbent, lint-free rag or towel that has some nap to it, like a washcloth. The type of cloth you use and how you hold it will determine the finished texture effects.

Dip the rag in water, wring it out, then ball the rag up loosely in your hand and gently dip it into the second paint color. Blot off the excess on a paper towel, then touch the rag against the wall. Repeat this, re-gripping the rag as you go, to create different textures. Re-dip the rag in the paint as soon as it begins to lose the pattern you like. Ragging is usually done with only two colors, but you can add a third if you like - just make sure each color is completely dry before moving on to the next one.

Washing

As the name implies, this technique will leave thin wash of top-coat color over the base color, almost at though the wall has aged or been worn from use. Washing is best done with just one color over the base coat.

Paint on the base color and allow it to dry. Using the same type of rag or towel used for ragging, dip the rag in water and wring it out, then dip it into the paint. You can actually allow the rag to pick up a little more paint with this technique, but you do want to be sure that you do not have an excess amount on your gloves that could smear onto the wall.

Use the rag to apply the top color coat to the wall by actually wiping on the paint with a swirling motion - almost like you're washing the wall with soap and water - rather than dabbing it on as was done with the earlier techniques. Continue "washing" the wall with paint until the rag begins to dry and starts taking some of the paint back off. When you have removed a sufficient amount of paint to achieve the look you want, re-dip the rag in paint and move on to another section of the wall. The important thing here is to try and achieve some level of consistency with the finished look, rather than leaving large areas with a lot of paint on them and other areas with much less.

Remodeling and repair questions? E-mail Paul at paul2887@direcway.com.

Copyright 2005 Inman News

Distributed by Inman News

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Overnight real estate rates slide

30-year fixed rate at 5.34%; 10-year Treasury up at 4.3%
Long-term mortgage interest rates were lower on Thursday, and the benchmark 10-year Treasury bond yield jumped to 4.3 percent.
The 30-year fixed-rate average dipped to 5.34 percent, and the 15-year fixed-rate edged down to 4.95 percent. The 1-year adjustable was down at 3.71 percent.
The 30-year Treasury bond yield climbed to 4.64 percent.
Rates are current as of 7:15 p.m. Eastern Standard Time.
Mortgage rate figures are according to Bankrate.com, which publishes nightly averages based on its survey of 4,000 banks in 50 states. Points on these mortgages range from zero to 3.5.
In other economic news, the Dow Jones Industrial Average gained 206.24 points, or 2.06 percent, finishing at 10,218.6. The Nasdaq rose 48.65 points, or 2.54 percent, closing at 1,962.41.
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California: Agency Boosts Ceiling for Financing

The ever-soaring cost of residential housing in California has forced the state's affordable housing agency to make yet another round of increases to the maximum price of homes it will finance for first-time buyers. Over the last year, the California Housing Finance Agency has boosted the price ceiling an average of more than 20 percent for homes eligible for below-market interest rate loans and other assistance programs. The latest upward revision leaves Southern California with some of the most dramatic increases over the last 12 months. Qualified buyers now can purchase a home up to $582,000, a 31 percent spike, in Ventura County; $453,000, or 28 percent more, in Riverside County; and $559,000, or 22 percent more, in Los Angeles County. Increases totaling 11 percent established maximum prices of $643,000 in San Francisco, $588,000 in San Diego County, and $453,000 in Sacramento County. Theresa Parker, the agency’s executive director, says the new price limits, which are raised periodically during the year, are the highest possible allowed by federal guidelines. “It’s very exciting to be able to increase these sales limits and provide more opportunities for first-time buyers in our state,” Parker says. “Owning a home is the dream of many Californians, and these revised limits add strength to CalHFA’s programs and will help bring that dream closer for many families."
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Disappointing economy pushes real estate rates lower

30-year fixed drops to 5.8% in Freddie Mac survey
Mortgage rates fell for the third consecutive week as fears of an economic slowdown increased, according to surveys conducted by Freddie Mac and Bankrate.

In Freddie Mac's survey, the 30-year fixed-rate mortgage averaged 5.8 percent for the week ended today, down from last week when it averaged 5.91 percent. The average for the 15-year fixed-rate mortgage this week is 5.36 percent, down from last week when it averaged 5.46 percent. Points on both the 30- and 15-year averaged 0.5.

The five-year, Treasury-indexed, hybrid adjustable-rate mortgage averaged 5.22 percent this week, with an average 0.6 points, down from 5.31 last week. The one-year Treasury-indexed adjustable-rate mortgage averaged 4.26 percent this week, with an average 0.6 point, down from last week when it averaged 4.3 percent.

Interest rates in general have been oscillating with every piece of economic news released lately, said Frank Nothaft, vice president and chief economist. The market is switching its focus between the strength of the economy and the fear of inflation. Thus, although mortgage rates have dropped the last two weeks, that doesn’t necessarily indicate a trend.

That said, April’s mortgage rates are currently lower than those of the previous month. And lower mortgage rates will undoubtedly have a positive influence on housing activity.

In Bankrate.com's weekly survey, mortgage rates fell to the lowest point in two months, and have now dropped four weeks in a row. The average 30-year fixed-rate mortgage dropped from 5.95 percent to 5.86 percent, Bank rate.com reported. The 30-year fixed-rate mortgages in this week's survey had an average of 0.3 discount and origination points.

The 15-year fixed-rate mortgage, popular for refinancing, declined by an even larger margin, falling from 5.55 percent to 5.42 percent. Meanwhile, the average rate for the jumbo 30-year fixed-rate mortgage retreated from 6.13 percent to 6.03 percent. Adjustable-rate mortgages dropped also, with the average 5/1 adjustable-rate mortgage falling from 5.41 percent to 5.31 percent, while the one-year ARM retreated from 4.69 percent to 4.61 percent.

Disappointing economic data spurred another decline in mortgage rates, according to Bankrate.com. Lackluster retail sales and a nearly 18 percent drop in housing starts fueled fears of a broader economic slowdown. Investors responded by moving cash into long-term government and mortgage-backed bonds, pushing yields lower. Mortgage rates are closely related to yields on long-term bonds, which fluctuate with changing outlooks for inflation and the economy.

The following is a sampling of Bankrate's average 30-year-mortgage interest rates this week in some U.S. metropolitan areas.

New York: 5.88 percent with 0.15 point
Los Angeles: 5.88 percent with 0.43 point
Chicago: 5.92 percent with 0.03 point
San Francisco: 5.89 percent with 0.24 point
Philadelphia: 5.84 percent with 0.22 point
Detroit: 5.82 percent with 0.25 point
Boston: 5.94 percent with 0.1 point
Houston: 5.81 percent with 0.6 point
Dallas: 5.87 percent with 0.43 point
Washington, D.C.: 5.76 percent with 0.59 point
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No easy way to avoid tax on profitable vacation-home sale

Principal-residence restrictions get in the way
By: Robert J. Bruss: Inman News
DEAR BOB: After about 14 years of very enjoyable vacation-home ownership, my wife and I have concluded it is time to sell. Market values have greatly appreciated in the vicinity. We can earn at least a $300,000 net profit if we sell now. Realty agents are constantly hounding us to sell. But we only paid about $46,000 so we will have a tremendous tax to pay. Because this is not our principal residence, nor do we rent it to tenants when we aren't using it, how can we avoid tax when we sell? – Wayne T.

DEAR WAYNE: There are several possibilities. One is for you and your wife to move into the vacation home full-time as your principal residence for at least 24 of the 60 months before its sale. Then you can qualify for up to $500,000 principal-residence-sale tax-free profits.

If that doesn't interest you, another alternative is to rent your vacation home before its sale, perhaps on a lease with option to purchase. Then you can sell your rental property and qualify for an Internal Revenue Code 1031 tax-deferred exchange for another qualifying rental property of equal or greater cost and equity.

That's it. If you don't like either of those alternatives, you'll just have to resign yourselves to paying the current 15 percent federal capital gains tax rate, plus any applicable state tax where your vacation home is located. For full details, please consult your tax adviser.

$500,000 PRINCIPAL-RESIDENCE-SALE TAX BREAK CAN BE USED AGAIN

DEAR BOB: We plan to sell our home and use the $500,000 tax exemption that you often discuss. When we purchase our next home, can we take that exemption again after five years? – Leslie R.

DEAR LESLIE: Yes. But you don't have to wait five years to use the Internal Revenue Code 121 principal residence sale tax exemption again.
This wonderful tax break can be used over and over again without limit. However, it cannot be used more frequently than every 24 months.

After you buy your next home, if you have owned and occupied it at least 24 months before its sale, you can use your principal residence sale exemption again to shelter up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return) tax-free profits. For full details, please consult your tax adviser.

CARRY OVER UNDEDUCTED "SUSPENDED" REALTY TAX LOSS

DEAR BOB: On my recently filed 2004 income tax returns, I had about $34,000 tax loss from my rental property. But the tax law allows me to only deduct up to $25,000 of that loss against my ordinary taxable income from my job. Do I lose the undeducted $9,000 of my tax loss? – Martha W.

DEAR MARTHA: No. You have a "suspended" tax loss. That means your excess $9,000 tax loss from your rental property, probably due to the wonderful non-cash tax deduction for depreciation wear, tear, and obsolescence, must be saved for use in future tax years.

Keep careful track of your suspended, unused tax losses from your rental property. You can deduct such suspended losses in future tax years. Or, as happened to me when I sold some of my rental properties, I used my suspended tax losses to avoid tax on my capital gains. For full details, please consult your tax adviser.

The new Robert Bruss special report "How to Get Started Investing to Earn Big Real Estate Profits" is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at http://www.bobbruss.com/. Questions for this column are welcome at either address.

For more information on Bob Bruss publications, visit his Real Estate Center.
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Savvy real estate buyers crowd path to tax-free profits

Using home-sale exemption to its full potential
By Robert J. Bruss: Inman News
Internal Revenue Code 121, the principal-residence-sale tax exemption, can be used over and over again, without limit, but not more frequently than once every 24 months. Some savvy home buyers have even created a tax-free business by buying a fixer-upper house, living in it at least 24 months, meanwhile renovating it to increase its market value.

If you do this over and over, you will soon become known as a tax-free "serial home seller!" A single person can qualify for up to $250,000 tax-free profits, but a married couple (or two qualified, unmarried co-owner residents) can qualify for up to $500,000 tax-exempt profits every 24 months. The big drawback, however, is living in the home while it is being renovated!

TESTS FOR DETERMINING YOUR PRINCIPAL RESIDENCE. Your IRC 121 primary or principal residence (the IRS calls it your "main home") is not always clear-cut, especially if you own two (or more) homes where you divided your occupancy time.

IRS regulations say your principal residence is "the property that the taxpayer uses a majority of the time during the year will ordinarily be considered the taxpayer's principal residence." Short absences, such as for a vacation, count as occupancy time, such as spending two months in Europe. But a one-year absence from your home won't count as occupancy time (unless you meet the medical care exception explained earlier).

The latest IRS regulations also say: "In addition to the taxpayer's use of the property, relevant facts in determining a taxpayer's principal residence include, but are not limited to the: (1) taxpayer's place of employment; (2) principal place of abode of the taxpayer's family members; (3) address listed on the taxpayer's federal and state income tax returns and driver's license, automobile registration, and voter registration card; (4) location of the taxpayer's banks; and (5) location of religious organizations and recreational clubs with which the taxpayer is affiliated."

A major drawback of these IRS regulations is they might indicate a taxpayer's principal residence is at one home, but the taxpayer spends the majority of time at the other home.

EXAMPLE: Suppose a retired couple spends seven months of each year in their Minnesota condo and five months at their Florida home. The Minnesota home looks like their principal residence based on the majority of time test. However, if the couple files their income tax returns from Florida (which has no state income tax), vote in Florida, have a Florida homestead exemption, have their auto and driver's licenses in Florida, and have their bank accounts with a Florida bank, now it looks like the Florida residence is their principal residence. Based on the minimum 24-month occupancy test within the last five years before sale, either home meets that test.

PRINCIPAL RESIDENCE SALE EXEMPTION CAN INCLUDE PROFIT FROM THE SALE OF AN ADJOINING VACANT LOT. If you separately sell a vacant lot next to your principal residence, and if you sell it within two years before or after selling your principal residence, the lot sale capital gain can be included with the home-sale tax exemption. Of course, if you sell the lot to the buyer of your principal residence, the lot sale profit also clearly qualifies for the exemption.

However, this lot sale exemption only includes a "reasonable amount" of land adjoining your primary residence. This tax exemption cannot be used, for example, to make a tax-free farm sale just because the farm adjoins your home. Only the market value of the residence plus a reasonable amount of adjoining land can qualify.

NO ALLOCATION OF BASIS IS REQUIRED FOR HOME BUSINESS USE UNLESS THAT BUSINESS OPERATES FROM A SEPARATE BUILDING. If you operate a home business from your residence, when selling that property it used to be necessary to, in essence, make two sales – one of your principal residence and the other of your "business area." Fortunately, that is no longer necessary.

Tax advisers used to even suggest that you not claim any home business tax deductions for at least two years before selling your home – again, that is no longer necessary unless your home business is operated from a separate building on your residence property. Then an allocation to the value of the business building is required.

However, home sellers who claimed depreciation deductions for the business area of their residence after May 6, 1997, (the effective date of IRC 121) will have that depreciation "recaptured" (that means taxed!) upon home sale at a special 25 percent federal depreciation recapture tax rate. Home business depreciation deducted before that date is not recaptured and is taxed as long-term capital gain, subject to the $250,000 or $500,000 exemption.

IF YOU OWNED AND/OR OCCUPIED YOUR PRINCIPAL RESIDENCE LESS THAN 24 MONTHS WITHIN THE FIVE YEARS BEFORE ITS SALE, YOU MAY BE ENTITLED TO A PARTIAL $250,000 OR $500,000 EXEMPTION. Internal Revenue Code 121 pas passed by Congress in 1997 included three provisions for partial use of the $250,000/$500,000 exemptions: (1) change of employment location qualifying for the moving expense deduction, (2) health reasons, and (3) unforeseen circumstances. Those first two exceptions didn't cause much confusion. But the third exception, even after clarifying the new IRS regulations, still causes confusion. Let's take a look at each exception:

Change of employment location. If the home seller qualifies for the moving expense tax deduction, then that seller can also qualify for a partial IRC 121 exemption if the principal residence was owned and/or occupied less than the required 24 months during the five years before the home sale. Briefly, the moving expense deduction requires the taxpayer's new work location to be at least 50 miles further from the old principal residence than was the old work site.

EXAMPLE: Suppose your old principal residence was four miles from your old job location. You then changed job locations (whether with the same employer, a new employer, or you became self-employed doesn't matter). To qualify for the residential moving cost tax deduction, you new job location must be at least 50 miles further from your old home than was your old job site. In this example, that means your new work location would have to be at least 54 miles (4 + 50) to qualify. If you meet this test, you then also can claim the partial home-sale tax exemption.


The moving cost tax deduction also has work time tests, such as remaining employed at least 39 weeks during the year after the move in the vicinity of the new job location. For self-employed individuals, the minimum qualifying work time test is 78 weeks during the 104 weeks after the job location change. Either spouse can qualify, but "tacking" work time of one spouse unto another spouse's work time is not allowed.

Health reasons. Just because you think you will feel better living in Arizona rather than Alaska is not a sufficient health reason for selling your Alaska home and claiming a partial IRC 121 tax exemption! Qualified health reasons must usually be based on a physician's recommendation to the homeowner or a family member.

Health purposes can include (1) to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, and (2) need to move to care for a family member. But a home sale that is merely beneficial to the general health or well being of the individual does not qualify for the partial exemption.

Unforeseen circumstances. IRS regulations now include several "safe harbor" principal residence sale reasons, which the IRS will not challenge. The first five reasons must involve the taxpayer, spouse, co-owner, or member of the taxpayer's household. In addition, the IRS Commissioner has authority to approve a partial exemption for other unforeseen circumstances. The "safe harbor" unforeseen circumstances are:

(1) Death in the immediate family; (2) divorce or legal separation; (3) becoming eligible for unemployment compensation; (4) change in employment leaving the taxpayer unable to pay the mortgage or reasonable basic living expenses; (5) multiple births resulting from the same pregnancy; (6) damage to the residence from a natural or man-made disaster, or an act of war or terrorism; and (7) condemnation, seizure or other involuntary conversion of the property.

If you qualify, calculate the partial IRC 121 $250,000 or $500,000 percentage exemption based on your number of months of occupancy. If you qualify for a partial exemption, as explained above, it's easy to calculate your percentage exemption. The denominator of the fraction will always be 24 (months). The numerator will be the number of months you occupied your principal residence before moving out for one of the above reasons.

EXAMPLE: Suppose you owned and lived in your principal residence for 16 months before receiving a job location transfer notice from your employer, which qualifies for the moving-expense tax deduction. Your fraction will be 16/24 or two-thirds, which is 66.7 percent of the $250,000 or $500,000 exemption for which you are otherwise qualified. In this example, you therefore can claim up to $166,750 or $333,500 tax-free, home-sale profit, depending on whether you are single or married, meeting the partial-occupancy time test.
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