Mortgage Blog

I'm not an insurance agent, but I've heard enough stories to know that when reviewing your homeowner's insurance coverage, don't assume that everything will be covered in case of a claim. 

In fact, a National Association of Insurance Commissioners' survey revealed that homeowners misunderstood what their policy covered.  Here are some of the things NOT covered by standard homeowner's insurance policies:

• 68 percent think vehicles such as cars, boats and motorcycles stolen from or damaged on their property are covered.
•  51 percent think damages from a break in the water line on their property supplying water to their home are covered.
•  37 percent think damages due to a break in the sewer line on their property that connects to their municipal sewer system are covered.
•  35 percent think damages from earthquakes are covered.
•  34 percent think damages from mold are covered.
•  31 percent think damages from termites or other infestation are covered.
•  22 percent think pets stolen from or injured on their property are covered.

A balloon mortgage is one on which the outstanding balance is due at some point before amortization has paid off the balance in full. Aside from the repayment obligation, balloon loans are identical to standard fixed-rate mortgages (FRMs).

For example, if a 5-year balloon loan for $100,000 is at 5% for 30 years, the initial payment of $537 would be the same as on an FRM with the same rate and term. The difference is that on the balloon loan, the balance of $91,829 after 5 years must be repaid. At that point, the loan may be extended at the current market rate, or refinanced with the current or a different lender.

In Canada, 1 to 5-year balloon mortgages have long been the standard instrument. They have been less common in the U.S., but a number of them were written in the years immediately prior to the financial crisis with balances due in 5 or 7 years. That means that they are now coming due.

Refinancing Out of a Balloon

Borrowers with balloon mortgages who are able to refinance, either with their existing lender or another lender, may be concerned about the timing.

"I have a balloon payment due 12/10/11 and am refinancing with a different lender who is taking his time and I am getting nervous. What will happen if the new loan is not closed until after the due date on the balloon?"

Nothing very serious will happen. The lender holding the balloon will charge interest for each day of delay beyond the due date, but that's all. However, it is a good idea to keep both lenders informed about your progress.

Last year, the IRS announced that all tax-preparers are required to:

● Register with the Federal Government

● Pass a competency test

● Take continuing education courses

● Obtain a federal Preparer Tax Identification Number (PTIN)

But, even if they are registered and have a PTIN number, it does not necessarily mean that they are competent. In a recent audit, the IRS had found substantial errors – overlooking common deductions, or incorrectly interpreting the tax code.

You might even want to hire another tax preparer to review previous tax returns to make sure you claimed everything you were entitled to deduct.

Before hiring a tax preparer, consider the following:

● Check with the Better Business Bureau to see if any complaints have been filed

● Check to see if they have a PTIN number from the IRS

● If CPA or Attorney, check with your state's professional board for complaints and if they have a current license

● Ask what continuing education courses they have taken within the last 12 months

● Ask if they belong to any professional organizations

● Ask how long they have been preparing tax returns

● Ask if he/she is familiar with the "type" of tax return you need to file

● Find out how they determine the fees you will pay (will it be hourly or flat fee?)

● How many clients have they represented in IRS audits?

Steer clear of tax preparers who claim they can get you a larger refund - without reviewing your paperwork first.

Steer clear of tax preparers who charge a "percentage" of your refund - the tax return may contain inaccurate info in order to pump up the refund amount.

Steer clear of tax prepayers who have "a lot" of experience with representing clients who have been audited - this may be a sign that they claim "questionable" deductions.

If you need a good tax preparer, please email or call me, because being in the mortgage business, I know several who are truly competent and I know will help you get your tax return filed accurately and filed on time.

Q: What is the down payment?

A: The down payment is the property value less the loan amount. It is not the same as the borrower's cash outlay if some of that outlay is used for settlement costs. On a newly constructed home, the land value can be part or all of the down payment.

Q: If the appraised value of a home exceeds the sale price, can the difference be applied to the down payment?

A: No, the property value upon which down payment requirements are based is the lower of sale price and appraised value. An appraisal higher than the price is disregarded.

But there is an important exception, called a gift of equity, where the home seller is someone near and dear, usually a family member, who is willing to sell below market value. In such cases, the lender will probably require two appraisals, and the seller must follow IRS rules to avoid gift taxes, but those are minor nuisances. 

Q: Can a home seller contribute to the buyer's down payment?

A: No, because of a presumption that such contributions will be associated with a higher sales price.  However, subject to limits, home sellers are allowed to pay purchasers' settlement costs. This reduces the cash drain on purchasers, allowing more of it to be used as a down payment.

Q: Can the lender contribute to the buyer's down payment in exchange for a higher interest rate?

A: No, but lender rebates or "negative points" can be used to pay settlement costs as a possible alternative to seller contributions.

As we all take a break during the Holidays, we can reflect upon the events over the past year. It was certainly an eventful year--from global natural disasters to revolutions in many countries to the European debt crisis. Any one of many events could have brought our economy back into recession, yet we go into the New Year with renewed financial vigor. The recovery from our recession has been so painfully slow that it is hard to see the progress, but it is there. For example, during the height of the crisis, first time claims for unemployment peaked at 650,000. Last week, the number was below 370,000, not far from where it stood at certain points in 2005 and the lowest since 2008. We were also losing close to 800,000 jobs per month during the height of the recession and now we are adding over 100,000 jobs per month. Does this mean we are out of the woods? Absolutely not. The unemployment rate was a stubbornly high 8.6% last month and it was approximately 4.5% before the recession hit. On the other hand, we were at 10% just a few months ago, so again we are moving in the right direction.