Should the Mortgage Interest Deduction be eliminated?

There is a lot of talk on Capitol Hill about eliminating the Mortgage Interest Deduction (MID). The federal government is facing a huge gap between the money they take in versus what they spend. I know there is a ton of waste going on in the government but that is a discussion for later. The fact is, law makers are looking to get more money from us tax payers and just about every tax deduction is on the table for elimination or overhaul. According to CNN Money, MID is costing  the government $573 BILLION in tax revenue from 2009-2013. Can’t you see them rubbing their hands together, with an evil laugh and drooling when they see that number?

Looking further into what the MID includes, I think there are some things that can be done to the MID without eliminating it completely.  Did you know a second home’s mortgage interest can be deducted? According to the IRS, a second home is considered a second residence and not an investment property. If you have a second home you are probably making enough money to lose that the tax deduction on the second home. Did you know that a yacht qualifies as a second home? Me neither. I get that some people choose to live on a boat and it actually sounds kind of cool. What I don’t get is that you can claim that yacht as your second residence and get a tax break on the mortgage interest.  Come on now! I don’t think eliminating the yacht interest write off from the tax code is going to have much effect on the rich or super rich buying a yacht. They all still want to be on their boat feeling like Captain Jack Sparrow or screaming “I’m the king of the world” from the front of it. Well, at least that’s what I would do.

I don’t see how the elimination of the MID helps the home owners or the already fragile Real Estate market. I am sure there are other things that can be done to modify the MID in the tax code (the National Association of Realtors is 100% against changing any of it) but I think a complete elimination of the MID is a bad idea. There are many homeowners that are still making payments on homes that are worth 50% of what they owe because the tax deduction makes it worth it for them. Would you still pay on your upside down mortgage if can’t use the deduction?  If you are in the market to buy your first home, would you still want to buy if there was no more MID?

 

“You Know You’re Caught When…” – Self Assessment

Being caught in financial distress is a hard realization and sometimes people don’t even recognize the warning signs. Let’s face it – the topic of finances is still the #1 source of stress and relationship discord. This self assessment quiz isn’t a solution, just a tool to help you take control of your financial situation and seek help if needed. Don’t be caught unaware, take control today!

You know you’re caught when… you have any of the following obvious signs:

• Job loss
• Loss/decrease in income
• Rate adjustment on your mortgage
• Already more than 30 days late paying your mortgage
• Negative amortization (your payments don’t include paying towards the principal)

You know you’re caught when you…

• Owe more on your mortgage than your home is worth
• Rely on credit cards to pay your monthly living expenses (Don’t have a budget? Sign up for my newsletter and I’ll send you a financial worksheet free so you can get started on monitoring your monthly expenses today!)
• Have rising household expenses (for example: rates on your credit cards have adjusted up, you have additional child care expenses, accrued medical debt, etc.)
• Experienced serious family illness or injury
• Going through a divorce or split of domestic partnership

If any of the previous statements are true, please take immediate action to take control of your financial future. If you need direction on how to get started, read on to our popular post “I’m Caught, Now What?“ If you have questions on your particular situation, please don’t hesitate to contact my team through my Contact page. We will prompty return your inquiry. This may be one of the hardest realizations, but it is possible to rebuild your life and financial future. The more time you delay, the further you have to climb to get out of your current situation. Start rebuilding today!

I Lost My Job, Now What?

You thought you were secure and prepared to dig in and ride out the economic downturn. Then, the unthinkable happens; you get laid-off or receive a notice that your company is downsizing and your position has been eliminated. Ahh! Take a breath, don’t panic! You’ll need your wits about you to act quickly to save you and your family from a financial disaster. It could get worse? Oh yes! Losing your job or being laid off is just the start. If you don’t make some quick changes,this loss of income will affect you for a long time to come.

What to do?

First, sit down an update your budget. Yes, I talk a lot about budgeting and mention it all the time. It’s so important to have pre-set spending limits. But most importantly, you need to reconcile your budget against your actual spending habits. With the invention of the debit card, a lot of us have gotten away from balancing the old checkbook register. Time to get with the program! A really helpful tool to help you track your spending is www.mint.com. This is a fabulous online resource (they even have an app for the iphone to allow you to track your expenses on the go)!  It’s safe & secure because it does not allow you to make transactions, it just reports information.  Be sure to read their security policy for more information.

Secondly, cut your budget (and still allocate money towards savings) to equal the income you have coming in. Don’t immediately start dipping into your savings cushion to maintain your lifestyle while you look for a job. Whoa! Radical, yes. Over-reacting, no. If you’re reading this post and have not lost your job, I would highly recommend that you seriously look at your budget, expenses, and your savings. If you don’t have at least 6 – 9 months worth of reserves saved up, you need to slash as much as you can from your budget to prepare you for the unthinkable. If you cannot get your expenses down to equal the amount of income you have coming in, pick up the phone and start dialing. Start with your mortgage company and inform them of what has happened and ask for help. There are several options that the lender can offer, if they don’t – ASK them and prepare to be persistant.

Options you can ask about include:

• Loan Extension – where your lender “freezes” your loan for periods of up to 3 months, during which time no payment is due. The payments are then added on to the end of your loan at your normal monthly payments.
• Forbearance – this option allows you to work out an alternative payment schedule with your lender, details of this arrangement will vary by lender and the type of loan you have. If you have a government loan such as FHA or VA you may qualify for additional help.
• Loan Modification – the terms of your loan are modified, usually this involves changing the term of the loan and the interest rate (if you are unemployed, you may not qualify since you need to show an ability to re-pay the loan).
• Loan Refinance – if you have a higher interest rate or adjustable rate mortgage, you may be able to refinance your mortgage down to a lower monthly payment. But this option requires you to be able to pay closing costs, equity in your home, and be able to prove you have the income to re-pay the loan. This might work if you have one borrower still working who can qualify for the mortgage on their own.
• Assistance under the Homeowner Affordability & Stability Plan. In February the Government announced a new plan designed to help homeowners avoid foreclosure and stay in their homes through several different avenues. For more on the overall plan see the press release. To see if you qualify, click here where you can take an online self assessment quiz and find links to speak to a HUD-Approved housing counselor for additional help.

Third, continue calling all your creditors to negotiate lower payments, interest rates on credit cards or other payment arrangements. Even on your services like phone, internet and cable call your provider and ask for a discount or explain your situation and ask what they can do to help you. The economic downturn has affected almost everyone and rather than lose your business, they’d like to retain your future business by helping you today.

It goes without saying, but I’ll say it anyway – file for unemployment benefits as soon as you lose your job. Don’t wait, it may take several weeks for them to process your application and get your paperwork in order. Many states allow you to file for unemployment benefits online. To find links to your state’s unemployment office, click here. Recent changes in the stimulus bill passed by the Government extends the amount of time you can collect unemployment from 26 weeks to now 33 weeks. Some states are even extending that time period based on state initiatives. Another facet of change to the unemployment benefits under the new stimulus bill is an extra $25 per week calculated into your benefits. The final change is making the first $2,400 you receive federally tax-free. After that amount, you pay your normal federal income tax on it.

In closing, the quicker you act the less devastating the results are going to be. Even if you haven’t lost your job, prepare for it anyway because it could very well happen to you or someone you love. Be prepared to monitor your finances weekly and monthly to stay on top of your spending. Get everyone in the family involved and on the same page right at the beginning so that there are no surprises down the road. As always, please let me know if you have questions or need further assistance on this topic by utilizing my Contact Page. If you have some tips or resources to share, please post them here to help your fellow readers! We want to hear from you!

Critical Elements of the “Hardship Package”

First of all, you’re probably wondering what the heck a “Hardship Package” is. I did the first time I heard the term! The hardship package is the term for the group of documents you’ll gather to ask your lender for assistance through a loan modification or short sale. I wanted to outline the package here so you know what each element is and I’ve also included tips for completing the package correctly. Even though your Realtor® will put the package together (if you’re doing a short sale), they may ask you for these elements and you should be ready to produce them quickly. Hardship package requirements vary by lender, but here’s what you can generally expect to provide (items shown with * indicate documents specific to a short sale request):

1. Most recent (consecutive) two years tax returns – Federal return only, include all pages and schedules for all borrowers on the loan(s).
2. Most recent (consecutive) two months bank statements – provide all pages for ALL accounts that you and/or the co-borrower own.
3. Most recent (consecutive) two months pay stubs – for all borrowers on the loan(s).
4. Hardship Letter – this is a letter written by the borrower(s) on the loan in which they ask for the lender to consider a loan modification or short sale (whatever the case may be) and explains to the lender what has happened or what the hardship is that does not allow them to be able to maintain the current financial responsibility for the mortgage(s). It should be short and sweet, as concise as possible – you don’t need to share intimate details of your life.
5. Personal/Household Financial Statement – this is sort of like your budget, most lenders have a standardized format (which you can get for free once you sign up for my newsletter). The financial statement will outline all your income, assets, and expenses to show whether or not you have a surplus of funds each month or you’re in the red every month and are unable to pay.
6. *Purchase Contract – this is the offer from a potential buyer to purchase the property. Each state’s set of documents are different, but some states include a Short Sale Addendum form for buyers that has specific disclosures to the buyer regarding the short sale process: i.e. the acceptance is not bound until the lender(s) issue written approval and also defines the escrow period as beginning the day after the lender’s approval letter is delivered to the buyer’s agent.
7. *Listing Agreement – this is the agreement that the sellers sign to authorize the Realtor® to list and advertise the house for sale. Each state’s set of documents are different, but some states include a Short Sale Addendum form for sellers which contains special disclosures to the seller regarding the short sale process: i.e. there are credit and legal consequences, speak to the appropriate professionals before signing the listing agreement.
8. *Estimated HUD Statement – your Realtor® will obtain this from the title company who will be handling the escrow once the lender approves the sale. It is an estimated net sheet which accounts for all the costs involved in the sale and shows the lender what their potential loss will be. It’s important that this HUD be accurate and include all the payoffs for liens so nothing comes up later in the sale and delays the process. Approval letters from the lender are usually only good for 30 days, so the sale needs to go quickly once approved.
9. Comparative Market Analysis or Broker Price Opinion (a.k.a. BPO) – this isn’t required by lenders, but is usually helpful to show the lender what the property is worth and how the listing price was established. It should support the purchase price negotiated on the Purchase Contract.

Hope this information helps you with your quest! If not, please be sure to drop me a line on my Contact Page with your questions and I’ll be sure to get back to you. Also, I’m totally into networking and sharing – if you have tips to share based on your experience with your lender(s), be sure to leave it here on my Comments section.