Welcome to Blackjack Realty's Blog

Welcome to our Blog! We hope you find some informative information. Please feel free to comment and ask questions. We look forward to your feedback.

Measuring Square Footage

Square footage is commonly used to determine if a home will fit a buyer's needs.The price per square foot can be used to compare the costs of different homes and even, determine the value of a property.

The challenge is what is the source of the square footage measurement and how was it done.

County records use square footage to determine assessed value for property tax purposes.They are assumed to be reliable but there can be inaccuracies in their tax rolls.Another source of square footage could be from the house plans but the problem there is that the builder may have made modifications, or a subsequent owner could have made additions.

Appraisers are required to measure the home to determine square footage and they generally, adhere to a standard method which leads to uniformity in the industry.The ANSI, American National Standards Institute, guidelines are considered the standard but there are no laws governing the process.

Because basements are below grade level, regardless of whether they are finished, they are typically not counted toward gross living area. Attics because they are above grade level can be included in gross living area if they are finished to the same standard as the rest of the home and they meet the minimum height requirement of seven feet.

Unfinished areas are usually not considered in the square footage because it is not livable.

For detached properties, it is common to measure the perimeter of the house but to only include the living areas, not porches, patios or garages.Gross living area includes stairways, hallways, closets with minimum height and bathrooms.Covered, enclosed porches would only be considered if they use the same heating system as the house.

By contrast, condominiums, generally measure the inside area of the unit. Some appraisers may add six inches to account for the wall thickness. If you were to compare the total of the interior room measurements of a detached home, it would be far less than the stated square footage using the normal method.

If the county records are significantly different from the appraisal or the plans, it will be necessary to determine which one is more accurate.This may require getting the home measured by an appraiser which should be less than paying for a complete appraisal. 

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Checking for Water Leaks

Aside from standing water in your yard or water running out from under a sink, the first indication that you might have a water leak comes from a larger than normal water bill.Before calling a leak specialist or a plumber, there is a simple diagnostic you can perform.

Go through your home and make certain that all the faucets are turned off and that the toilets have indeed stopped filling the reserve.Then, go to the water meter and make a mark on the lens where the dial is currently.If there is water in the meter box, the meter itself could be leaking.

If the meter is still turning, the leak is between the meter and the house. By inspecting the area between the meter and the house, you can look for soft, muddy areas or grass that is greener than the rest of the yard.

One of the hardest places to isolate a leak is in a swimming pool.If you have an automatic filler, like in a toilet, you'll need to turn it off.Mark the water line on the wall and wait to see if the water level goes down.There will be a certain amount attributable to evaporation.

Some leaks can be very difficult to locate.Plumbers, by the very nature of their job, will be more familiar with tracking down the source of the leak than a homeowner.There are some non-invasive techniques like acoustic listening devices, heat scanners and miniature video cameras on fiber optics that professionals can use.

Leaks can be expensive from the loss of water and the resulting damage that it can cause.Determining where the location of the leak can also cause damage because plumbing is usually concealed in walls or under concrete. For particularly difficult to locate leaks, discuss how the professional intends to locate the leak and minimize damage in the process. 

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Building Equity

Owning a home is the first step to building equity.Tenants build equity but not for themselves; they build it for the owners.

Equity is the difference in the value of the home and what is owed on the home.There are two dynamics that cause this to grow: appreciation and principal reduction.

As the home increases in value, it is said to appreciate.Various authorities will annualize an appreciation rate based on average sales prices from one year to the next.Since appreciation is based on supply and demand as well as economic conditions, it will not be the same year after year.

If you looked at a ten to twelve-year period, some would be higher than others and there may even be some individual years that it is flat or even declined.For the most part, values tend to appreciate over time.

Most mortgages are amortized which means that a portion of the payment each month is applied to the principal in order to pay off the loan by the end of the term.A $300,000 mortgage at 4.5% for 30 years has $395.06 applied to the principal with the first payment.A slightly larger amount is applied to the principal each following month until the loan is paid with the 360th payment.

If additional principal payments are made, it will save interest, build equity faster and shorten the term of the mortgage.Using the previous example, if an additional $250.00 principal contribution was made with each payment, it would only take 270 payments to retire the loan instead of 360.It would save $69,305 in interest and shorten the mortgage by 7.5 years.

To see the dynamics of equity due to appreciation and principal reduction, look at the Rent vs. Own.To see the effect of making additional principal contributions on your equity, look at the Equity Accelerator. 

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Taxes and the Homeowner

Whether you're an owner now or expect to be one in the future, it is important to be familiar with the federal tax laws that affect homeownership.Since personal income tax was enacted in 1913 with the 16th amendment, homes have had preferential treatment.

The mortgage interest deduction is based on up to $750,000 of acquisition debt used to buy, build or improve a principal residence.In addition to the interest, the property taxes are deductible, limited to the new $10,000 limit on the aggregate of state and local taxes (SALT).The taxpayer may also deduct interest and property taxes subject to limits on a second home.

Homeowners can decide each year whether to take itemized personal deductions or the allowable standard deduction which was significantly increased under the Tax Cuts and Jobs Act of 2017.

Single taxpayers may exclude up to $250,000 of capital gain on the sale of their home and up to $500,000 if married filing jointly.They must have owned and lived in the home for at least two of the last five years.For gains more than these amounts, a lower, long-term capital gains rate is paid rather than one's ordinary income tax rate.

Capital improvements made to a home will increase the basis and lower the gain.Homeowners are probably familiar that large dollar expenses like roofs, appliances or major remodeling are capital improvements.However, many lower dollar items may also be considered improvements if they materially add value or extend the life of the property or adapts a portion of the home to a new use.

Homeowners are urged to keep records of money they spend on the home that they own over the years so that their tax professional can decide at the time of sale what they must report to IRS.

You can download a helpful Homeowners Tax Guide that explains in more detail and includes a worksheet to keep track of the basis of your home and capital improvements. 

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Show Them You're Serious

 June and July are the busiest home sale months of the year. When inventory is in short supply and you may be competing with other offers, it is important to show the seller you're serious. Make your offer look as good as possible because you may not get the chance to make or accept a counter-offer.

Put yourself in the seller's shoes.Your home has just gone on the market.There is lots of activity and suddenly, there is more than one offer to purchase.The seller's first consideration may be to accept the highest offer but there are many other things to consider like closing dates, closing costs, possible repairs, contingencies and of course, the ability of the borrower to get a loan.

Offer a fair price for the property in your initial purchase agreement.It shows sincerity and good faith that you're actually trying to purchase the home and not trying to take advantage of the seller.The old adage that you can always go up later may never happen if there are multiple offers on the property in the beginning.

  1. Remove the uncertainty that you may not be approved for a mortgage by having a pre-approval letter from your mortgage company.
  2. Show your sincerity by increasing the normal amount of earnest money customary for the area and price of the home.The earnest money will be applied toward your down payment and closing costs.Consider placing even more money in escrow when the contingencies have been met.
  3. Specify a closing date in the contract but acknowledge that you can be flexible to accommodate the sellers' moving date.If it becomes an issue, it still must be mutually agreed upon.
  4. Make the contingency periods shorter if possible to make the seller feel that they'll know sooner that the offer is solid.
  5. If the contingency really isn't important to you, leave it out of the offer.The more contingencies included in a contract, the more the seller will wonder what might happen to keep it from closing.
  6. Write a personal note to the seller explaining why you like and want their home.Consider including a picture of your family and pets.
  7. If you're not using a digital contract, physically sign the offer with a felt tip pen of contrasting color.You'd be surprised how this adds a personal touch to the offer.

One way to eliminate the competition of multiple offers is by not procrastinating.When you have decided to write a contract, don't wait; do it immediately and ask your agent to deliver it quickly.Your agent will be able to help you craft a solid offer that makes you look serious and can give you advice that may be unique to your situation.

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Don't Leave Home Without...

 You been planning this trip for some time and almost every detail has been considered...or has it?Have you thought about how to protect your home while you're out of town?What's going to make sure that everything you left is still there in you return?

Nothing could ruin a trip more than coming back to find out your home has been burglarized or worse.It makes sense to spend a little time before you leave on making sure your home is as safe and sound as it can be.

There are a host of devices to use across the Internet including camera door bells, video cameras, door locks, garage door openers, light and thermostat controls.You can monitor your home whenever you have an Internet connection.The question is whether you want the distraction from your trip.

Consider these low-tech suggestions along with your other normal efforts:

  • Tell your neighbors you'll be out of town and to be aware of any unusual activity.
  • Notify your alarm company
  • Discontinue your postal delivery
  • Use timers on interior lights to make it appear you're home as usual.
  • Don't make it easy for burglars by leaving messages on voice mail or posting on social networks.
  • Post on social networks after you've returned about your vacation.
  • Remove the hidden spare keys and give it to a trusted neighbor or friend.
  • Lock everything, double-check and set the alarm.
  • Take pictures of your belongings in case you need them.
  • Disconnect TVs and other equipment in case of unexpected power surges.
  • Adjust your thermostat.
  • Arrange for lawn care.
  • Consider disconnecting the garage door opener.
  • Put irreplaceable valuables in a safety deposit box.

It's nice to go out of town on a well-deserved trip and it's always nice to get back home...especially when it is just the way you left it.

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Temporarily Renting a Home

IRS has provisions for homeowners regarding the sale of a principal residence that allows for temporarily renting the home without losing the ability to exclude the gain if the home is sold under the correct conditions.

The rules for the exclusion of gain on the sale of a principal residence are:

  • Up to $250,000 of gain may be excluded for single taxpayers and up to $500,000 for married taxpayers filing jointly.
  • Ownership and Use must have been a principal residence for two of the five years preceding the date of sale (closing date).This allows for a temporary rental for up to three years maximum.
  • Either spouse may meet the ownership test.
  • Both spouses must meet the use test.
  • No exclusion has been used in the previous 24-month period.

Let's pretend that a person had owned a home from more than two years.This person married and moved into their new spouse's home two years, six months ago.That person decided to sell the home and would have approximately $200,000 of gain in the sale.

If the property is put on the market, sold and closed prior to the three-years that they moved out, the home would still be eligible for the section 121 exclusion on the sale of a principal residence.If the sales closes after that three-year period, the owner would owe tax on the gain.If the long-term capital gains rate for the owner was 15%, they would owe approximately $30,000 in taxes.

If you or a person you know is in a situation like this, they should certainly seek professional tax advice as well as discussing the marketing and value of the property with their real estate professional.This is something that I have experience with; call me at (406) 594-0610.The timing is very important and critical to a favorable outcome. 

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Time to Buy Again

 For people who have experienced a distressed sale of a home and gotten their finances and credit back in shape, there can still be an unanswered question of "How long do we have to wait to qualify for another mortgage."The loan types for the new loan will differ in amounts of time based on the event.

The different lending authorities, VA, FHA, Fannie Mae (FNMA) and Freddie Mac (FHLMC), establish their own waiting periods.A borrower may be eligible to qualify for one type of mortgage before another type, even though during this waiting period, that the person was current on all payments and maintained a history of good credit.

The following chart indicates how long a person might have to wait.

A recommended lender can give you specific information regarding your individual situation and can make suggestions that will improve your ability to qualify for a mortgage.This process should be started before looking at homes because of the time constraints listed here can vary based on current requirements and possible extenuating circumstances of your case.

We want to be your personal source of real estate information and we're committed to helping from purchase to sale and all the years in between.Call us at (406) 594-0610 for lender recommendations.

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Comfort Systems

 Heating and air-conditioning are frequently referred to as the "comfort systems."If one has gone out in the dead of winter or the heat of summer, lack of comfort becomes a primary concern.Regular maintenance with a HVAC checklist is something that homeowners can do themselves to ensure that the units operate properly.

Periodically

  • Change your filter every 90 days; every 30 days if you have shedding pets.
  • Maintain at least two feet of clearance around outdoor air conditioning units and heat pumps.
  • Don't allow leaves, grass clippings, lint or other things to block circulation of coils.
  • Inspect insulation on refrigerant lines leading into house monthly and replace if missing or damaged.

Annually, in spring

  • Confirm that outdoor air conditioning units and heat pumps are on level pads.
  • Pour bleach in the air conditioner's condensation drain to clear mold and algae which can cause a clog.
  • Avoid closing more than 20% of a home's registers to keep from overworking the system.
  • Replace the battery in the home's carbon monoxide detector.


While using this list will provide some things that may impede the comfort system's proper performance, it is recommended that you have your units serviced annually by a licensed contractor.Furnaces should also be inspected for carbon monoxide leaks. Preventative maintenance may help avoid costly repairs.

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A Home Warranty Can Save Money

 Your income tax is probably filed for last year by now and you've been through your expenses for the year. Money spent on repairs to your home is not deductible but being aware of how much you spent last year may help you make a decision that could save you money this year.

Sellers, often, provide a home warranty to buyers to give them peace of mind by limiting some of the out-of-pocket money spent on unexpected repairs for one year.Home warranties can be renewed by the buyer by paying the annual fee and any homeowner can purchase one for their home whether they had one when they bought it or not.

A home service contract typically covers mechanical systems and built-in appliances in the home.Many times, these items are not covered by the homeowner's insurance policy.They can also include other things such as pool and spa equipment, and free-standing appliances like refrigerators, washers and dryers.

The process is simple.It doesn't cover pre-existing conditions.Once a plan is in effect, you call to report a claim.The company will assign a local profession to assess the problem and if covered, they will repair or replace the item.You will only pay a service fee.

Home protection plans can range in prices depending on area and coverages.Most start around $400-500 a year which could easily cover the cost for one claim alone.

For more information on home warranties in general, you can go to HomeServiceContract.org which is an association representing some of the premier home service contract providers.If you'd like to have a recommendation based on companies we work with in our area, give me a call at (406) 594-0610.

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iBuyers - Convenient at a Price

There are an increasing number of real estate companies, termed iBuyers, like Open Door, Offerpad, Zillow, Knock and others that market a service that has an appeal to homeowners.The pitch for these quick cash offer companies will include some variation of "let us buy your home in days without the normal hassles of listing."

This approach attempts to provide an alternative to selling a home in a normal manner at the expense of not realizing the full equity a homeowner is entitled. There is no fiduciary relationship requiring the broker to put a seller's best interest above their own interest.An iBuyer does not represent a seller and does not owe client-level services like loyalty, obedience disclosure among other things required by most state license laws.

The offer is based on an automated valuation model, many times, without a physical inspection of the home.In some cases, a contract is written but there are provisions that allow iBuyers time to possibly "flip" the property to an investor or use an "out" in the contract to void the sale.

The reality is that a company cannot stay in business if they pay too much for the property.The iBuyer becomes the Seller who now must be concerned with pricing the home properly to cover the normal selling expenses as well as repairs, improvements, and holding costs that will be incurred until the property sells.

There could be circumstances that make it necessary for a homeowner to sell their home at a discount.The seller could be in a distressed situation needing immediate cash.They might need a quick sale and don't want to be bothered with repairs or marketing efforts.Or possibly, they may have found their next home and need to act quickly. The instant liquidity comes at a cost to the seller in lower proceeds from the sale.

To realize the maximum possible equity, a real estate professional in your area can advise you about the fair market value of your home, a reasonably expected sales price, the costs involved and how long it will take.Before accepting a price to sell your home to a wholesaler, you owe it to yourself and your family to find out what you can expect if you take a conventional sales route. 

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One Loan for Purchase & Renovations

The FNMA HomeStyle conventional mortgage allows a buyer to purchase a home that needs renovations and include them in the financing.This facilitates the purchase of the home and the renovations in one loan rather than getting a separate second mortgage or home equity line of credit.

The combination of these loans should save closing costs as well as interest rates which would typically be higher on a home improvement loan.

The borrower will need to have an itemized, written bid from a contractor covering the scope of the improvements.Any type of renovation or repair is eligible if it is a permanent part of the property.Improvements must be completed within 12 months from the date the mortgage loan is delivered.

  • 15 and 30-year fixed rate and eligible adjustable rate loans are available.
  • Typical FNMA down payments are available starting as low as 3% for a one-unit principal residence to 25% for three and four-unit principal residence and one-unit investment properties.
  • Borrower must choose his or her own contractor to perform the renovation.
  • Lender must review the contractor hired by the borrower to determine if they are adequately qualified and experienced for the work being performed. The Contractor Profile Report (Form 1202) can be used to assist the lender in making this determination.
  • Borrowers must have a construction contract with their contractor. Fannie Mae has a model Construction Contract (Form 3734) that may be used to document the construction contract between the borrower and the contractor.
  • Plans and specifications must be prepared by a registered, licensed, or certified general contractor, renovation consultant, or architect. The plans and specifications should fully describe all work to be done and provide an indication of when various jobs or stages of completion will be scheduled (including both the start and job completion dates)

Up to 50% of the renovation funds may be advanced for the cost of materials after the closing of the loan.

This mortgage does have a provision for the borrower to do a portion of the work themselves if it doesn't exceed 10% of the total project and it must pass inspection on completion just as the contractor's work.

It is recommended that borrowers thoroughly research this program before they commit to a loan.For detailed information, see FNMA HomeStyle Renovation Mortgage and Selling Guide Announcement SEL-2017-02. It is important to work with a mortgage officer who is familiar with these loans who can guide you through the process. 

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Get Rid of Things You Don't Need

 Periodically, you need to rid yourself of things that are taking up you time and space to make room for more of what you like and want.

There's a frequently quoted suggestion that if you haven't used something for two years, maybe it isn't essential in your life.

If you have books you'll never read again, give them to someone who will.If you have a deviled egg plate that hasn't been used since the year your Aunt Phoebe gave it to you, it's out of there.Periodically, go through every closet, drawer, cabinet, room and storage area to get rid of the things that are just taking up space in your home and your life.

Every item receives the decision to keep or get rid of.Consider these questions as you judge each item:

  • When was the last time you used it?
  • Do you believe you'll use it again?
  • Is there a sentimental reason to keep it?

You have four options for the things that you're not going to keep.

  1. Give it to someone who needs it or will appreciate it
  2. Sell it in a garage sale or on Craig's List.
  3. Donate it to a charity and receive a tax deduction
  4. Discard it to the trash.

Start with your closet.If you haven't worn something in five years, get rid of it.Then, go through the things again and if you haven't worn it in two years, ask yourself the real probability that you'll wear it again.

Another way to do it is to move it from your active closet to another closet.If a year goes by in the other closet, the next time you go through this exercise, those clothes are on their way out.

If the items taking up space are financial records and receipts, the solution may be to scan them and store them in the cloud.There are plenty of sites that will offer you several gigabytes of free space and it may cost as little as $10 a month for 100 GB at Dropbox, to get the additional space you need.It will certainly be cheaper than the mini-storage building.

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Qualified Charitable Contribution

If you're at an age where you need to be taking Required Minimum Distributions (age 70.5) from your IRA, a qualified charitable contribution and some planning may allow you to lower your overall tax liability.

Let's say that a couple's 2019 itemized deductions include $8,000 in property taxes, $4,400 in interest and $20,000 in charitable contributions.That would total $32,400 which exceeds the 2019 $25,300 standard deduction for married couples, 65 years of age or older, filing jointly.

Their required minimum distribution from their IRA is $40,000 which will be taxed at ordinary income.If this couple is in the 24% tax bracket, the tax liability would be $9,600.

Alternatively, if they made the $20,000 in charitable contributions from their IRA as a Qualified Charitable Contribution, it would not be taxable in the withdrawal.The balance of the RMD of $20,000 would be taxable at 24% which would have a tax liability of $4,800.

Their $32,400 worth of itemized deductions would be reduced by the $20,000 because it was paid from the IRA which makes their itemized deductions $12,400.The $25,300 standard deduction would benefit them more by an amount of $12,900 increased deductions.At 24%, this would reduce their liability by $3,096.

In the first instance, they would owe $9,600 in taxes due to the $40,000 RMD from their IRA.In the second example, because of the increased amount by taking the standard deduction, the net tax liability would be $1,704 ($9,600 - $4,800 - $3,096 = $1,704).

This example shows how shifting contributions to a Qualified Charitable Contribution will get the same amount to the charity but lower the Required Minimum Distribution that must be recognized as ordinary income.The shifting also gives the taxpayers the advantage of a higher amount of the standard deduction than the itemized deduction.

As always, before taking action, you should get advice from your tax professional on how this strategy may impact you.There is information available on www.IRS.com for IRS Required Minimum Distribution FAQs and Qualified Charitable Distributions. 

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Reasons Rental Homes Rank Highest

 Single family homes offer the investor an opportunity to borrow large loan-to-value loans at fixed interest rates for long terms.Lenders will loan 75-80% of the purchase price at 5.5% to 6.5% interest rate for thirty years.Compare that with other popular investment alternatives like precious metals, commodities, stocks, and mutual funds and it will be hard to find financing available at all.

There may be some short term, one-year, loans at a floating rate tied to prime plus with no guarantee that it will be renewed.Some of those loans require you to have a 50% margin of equity and if the value goes down, you'll have to put up additional cash or be forced to sell.

The advantage of having long-term mortgages is that an investor could find the optimal time to sell the property instead of needing to sell it because the term is due, and no other financing is available.Supply and demand cause the real estate market to be higher and lower and a long-term mortgage provides options to sell when the price is optimal.

Single family homes enjoy distinct tax advantages.If the rental or investment property is held for more than 12 months, the gain is taxed at lower, long-term capital gains rates rather than ordinary income rates.

Another advantage of rental homes is that the improvements can be depreciated over a 27.5-year life.This is a non-cash deduction that reduces income and shelters income.The accumulated depreciation taken over the life of the property is recaptured when the property is sold.

Since rental homes provide income that other investments may not, tax would have to be recognized on the annual income.IRS allows normal operating expenses like interest, property taxes, insurance, repairs, and management to be deducted including the annual depreciation.

Rental and investment property are eligible for tax-deferred exchanges to avoid paying tax at the time of disposition.Real estate also enjoys stepped-up basis which means that when an heir inherits a property, instead of having a potential gain from the value the decedent had purchased it for less depreciation taken, the heir's basis becomes the fair market value at time of death.All potential gain may be permanently avoided.

Appreciation is a much-anticipated benefit of real estate because value tends to go up over time.

Another big benefit is the control that an investor has with rentals that is not available with other investments like stocks, bonds, or commercial real estate.It takes a relatively small amount of cash to control the entire investment in a home that wouldn't be available in other investments without partners or publicly traded companies.

Single family homes are an investment that homeowners understand because they are essentially the same as the home they live in.They're used for rental purposes but the maintenance is the same, the service providers are the same, and the neighborhood are the same.Most homeowners understand rentals far better than alternative investments.

Contact me at (406) 594-0610 if you'd like to know more about rental property.

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Will Points Make a Difference

 Lenders typically quote mortgages at a market rate but can offer a lower interest rate loan if the borrower is willing to pay points up-front which is considered pre-paid interest.These points are generally tax deductible for the year paid when the borrower pays them in connection with buying, building or improving their principal residence.

A point is one-percent of the mortgage amount.A lender will quote a lower-rate mortgage with a certain number of points.There is not a standard amount; it is an individual company policy.

A simple comparison of the two alternatives based on the borrower's ability to pay the points and whether the borrower will stay in the home long enough to recapture the costs will help to determine which loan will provide the cheapest cost of housing.

In the example below, two choices are compared; a 4.25% loan with no points vs. a 4.00% loan with one point.If the buyer stays in the home at least 69 months, they will recover the $3,150 cost for the point on the lower interest rate.

If the purchaser stays ten years, he'll save two thousand three hundred dollars over the cost of the point.A less obvious advantage will be realized because the unpaid balance on the lower interest rate loan will results in an additional $2,076 savings.

Use this Will Points Make a Difference app to discover whether paying points will make a difference in your situation.This is an example of a permanent buy-down but temporary buy-downs are also available.A trusted mortgage advisor can help you determine alternatives.

For more information about the deductibility of points, see IRS Publication 936 and if you're refinancing a home, there is a section specifically on that.For advice on your specific situation, contact your tax professional.

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Spring Forward

 Spring Forward on March 10th

This weekend, adjust your clocks forward by one hour. Most people find it convenient to change their clocks before they go to bed on Saturday night.

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More Than Just an Address

For a short time after the housing crisis a decade ago, some homeowners thought the value of home is a place to live rather than an investment.A home certainly has an appeal as a place to call your own, raise your family, share with your friends and feel safe and secure.It can be more than an address; it can also be one of the largest investments homeowners have.

Most mortgages apply a portion of the payment toward the principal amount owed in order to pay off the loan by the end of the term.This acts like a forced savings for the homeowner because as the loan is reduced, the equity grows which increases their net worth.

The other contributor to equity is appreciation.Most homeowners don't realize the increase in value until they sell the home or do a cash-out refinance, but the increase is real and part of their equity.If the expected appreciation is averaged over the anticipated time for the home to be owned, the value of the equity increase can be proportioned annually or monthly.

Combining appreciation and principal reduction with leverage, it's possible to build a case that a home is definitely an investment.Leverage is the ability to control a larger asset with a smaller amount of cash using borrowed funds.It has been described as using other people's money to increase your yield and it applies to homeowners and investors alike.

The table on the picture above shows that even a modest amount of appreciation combined with the amortization of a loan can cause a substantial rate of return on the down payment and closing costs.

This example assumes a 3% acquisition costs on the home with a 4.5% mortgage rate and the resulting equity at the end of five years.The larger down payments lower the yield because it decreases the amount of borrowed funds.

If a borrower buys a home that appreciates at 2% a year with a 3.5% down payment on a FHA loan for 30 years, the down payment and acquisition cost factored by the equity will produce a 28% return on investment each year during the five year period.

A home can be many things including an investment.You can use this Rent vs. Own calculator to see the effect that appreciation and principal reduction can have on a home purchase in your price range.If you have any questions, I'm a phone call away at (406) 594-0610. 

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Depends If You Can Afford It

Affordability, stability and flexibility are the three reasons homebuyers overwhelmingly choose a 30-year term.The payments are lower, easier to qualify for the mortgage and they can always make additional principal contributions.

However, for those who can afford a higher payment and commit to the 15-year term, there are three additional reasons: lower mortgage interest rate, build equity faster and retire the debt sooner.

The 30-year, fixed-rate mortgage is the loan of choice for first-time buyers who are more likely to use a minimum down payment and are concerned with affordable payments. For a more experienced buyer who doesn't mind and can qualify making larger payments, there are some advantages.

Consider a $200,000 mortgage at 30 year and 15-year terms with recent mortgage rates at 4.2% and 3.31% respectively.The payment is $433.15 less on the 30-year term but the interest being charged is higher.The total interest paid by the borrower if each of the loans was retired would be almost three times more for the 30-year term.

Let's look at a $300,000 mortgage with 4.41% being quoted on the 30-year and 3.84% on the 15-year.The property taxes and insurance would be the same on either loan.The interest rate is a little over a half a percent lower on the 15-year loan, but it also has a $691.03 higher principal and interest payment due to the shorter term.

The principal contribution on the first payment of the 30-year loan is $401.56 and it is $1,235.09 on the 15-year loan.The mortgage is being reduced by $833.53 more which exceeds the increased payment on the 15-year by $142.50.Interestingly, over three times more is being paid toward the principal.

Some people might suggest getting a 30-year loan and then, making the payments as if they were on a 15-year loan.That would certainly accelerate amortization and save interest.The real challenge is the discipline to make the payments on a consistent basis if you don't have to.Many experts cite that one of the benefits of homeownership is a forced savings that occurs due to the amortization that is not necessarily done by renters.

Use this 30-year vs. 15-year financial app to compare mortgages in your price range.A 15-year mortgage will be approximately half a percent cheaper in rate.You can also check current rates at FreddieMac.com. 

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Do You Know the Way?

 Fear of the unknown is common among all ages.Kids, at night, imagine monsters in their closets or under their beds and adults are unsure of what the future might bring.

It may be natural for first-time buyers to be unsure of the process because they haven't been through it before but even repeat buyers need to know changes that have taken place since the financial housing crisis.

The steps in the home buying process are very predictable and generally follow the same pattern every time.It certainly makes the move stay on schedule when you know all the different things that must be done to get to the closing.

  • In the initial interview with your real estate professional, you share the things you want and need in a home, discuss available financing and learn how your agent can represent you in the transaction.
  • The pre-approval step is essential for anyone using a mortgage to purchase a home to assure that they're looking at the right price of homes and so they'll know what they can qualify for and what the interest will be.
  • Even with lower than normal inventory, it is difficult to stay up-to-date with the homes currently for sale and the new one just coming on the market.Technology has simplified this process, but the buyer needs to implement them.
  • Showings can be accommodated online through virtual tours, drive-bys and finally, a personal tour through the home.Your real estate professional can work with you to see all the homes in the market through REALTORS®, builders or for sale by owners.
  • When a home has been identified, an offer is written and negotiation over price, condition and terms takes place.
  • A contract is a fully negotiated, written agreement.
  • Escrow is opened to deposit the earnest money from the buyer as a sign they're acting in good faith.The title search is also started so that clear title can be conveyed from the seller to the buyer and that the lender will have a valid lien on the property.
  • 88% of home sales involve a mortgage.The lender will require an appraisal to be sure that the home can serve as partial collateral for the loan.If the buyer has been pre-approved, the verifications will be updated to be certain that they're still valid.The entire loan package when completed, is sent to underwriting for final approval.
  • When the contract is completed, at the same time the title search and mortgage approval are being worked on, the buyer will arrange for any inspections that were called for in the contract.
  • After all contingencies have been completed, the transaction goes to settlement where all the necessary papers are signed, and the balance of the buyer's money is paid.This is where title transfers from the seller to the buyer.
  • Possession occurs according to the sales contract.

One of the responsibilities of your real estate professional is to make sure that things are done in a timely manner so that the transaction will close according to the agreement on time and without unforeseen or unnecessary problems.

Even if you're not ready to buy or start looking yet, you need to be assembling your team of professionals.Let us know and we'll send you our recommendations, so you can read about them on their websites.

If you have any questions, download this Buyers Guide and call us at (406) 594-0610; we're happy to help.Informed buyers lead to satisfied homeowners and that is better for everyone involved.

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