## The Difference Between Your Mortgage Rate and the Annual Percentage Rate (APR)

Understanding the difference between an annual percentage rate (APR) and an interest rate could save you thousands of dollars on your mortgage. But most homebuyers might not know that the interest rate and the APR measure two different costs associated with your home loan.

Interest Rate and APR

An interest rate is the cost of borrowing the principal loan amount. It can be variable or fixed, but it’s always expressed as a percentage. An APR is a broader measure of the cost of a mortgage because it reflects the interest rate plus other costs such as broker fees, discount points and some closing costs, expressed as a percentage

Why have both?

The main difference is that the interest rate calculates what your actual monthly payment will be whereas the APR calculates the total cost of the loan.

RELATED: 6 Mortgage Terms To Know

You can use one or both to make apples-to-apples comparisons when shopping for loans.

For example, a loan with a 4 percent rate will have a lower monthly payment than a loan with a 6 percent rate, assuming both are fixed for the same term. Likewise, the total cost of a loan with a 4 percent APR will be less than one with a 6 percent APR.

Where it gets tricky

Interest rates and APRs have limitations to helping you understand the true cost of your mortgage. But taken together, borrowers should be able to use both figures to determine their total costs. The trick is to understand the interplay between the two figures.

If you are only focused on getting the lowest monthly payment, then focus on the interest rate. But if you are focused on the total cost of the loan, then use the APR as a tool to compare the total cost of two loans.

This chart shows the interest rate, APR and total costs over time for a \$200,000 mortgage in which 1.5 discount points cut the interest rate by one-quarter of a percentage point, and another 1.5 discount points cut the interest rate by a further quarter of a percentage point.

3 loans, same amounts, 3 APRs

Time horizon matters

If you plan to stay in your home for 30 years or more, it probably makes sense to go with a loan that has the lowest APR because it means you’ll end up paying the lowest amount possible for your house. But if your time horizon isn’t that long, it may make sense to pay fewer upfront fees and get a higher rate — and a higher APR — because the total costs will be less over the first few years.

RELATED: Mortgage Default Explained… What Really Happens When You Can’t Pay Up?

APR spreads the fees over the course of the entire loan, so its value is optimized only if a borrower plans to stay in the home throughout the entire mortgage.

Figure the break-even point

If you’re planning to stay in your home for a shorter period, you need to do the math and determine your break-even point.

For example, if you chose a 0.25 percent lower rate for an additional 1.5 points because of the lower APR, but you moved in five years, you lost money. Your break-even on the points was seven years.

Unfortunately, those calculations can be confusing for many, which is why it’s crucial to pick the right lender. Your Buyer’s Agent should have excellent relationships with lender’s and can refer you to someone they trust.

Did you recently shop for a Mortgage? Do you have Buyer’s Remorse? What might you do differently now that you didn’t do then? We want to here from you! Sound off on our Facebook Page or on our Twitter, Instagram or LinkedIn feeds. And don’t forget to subscribe to our monthly HOME ADVICEtm eNewsletter for articles like this delivered straight to your inbox. You may unsubscribe at any time.

## 27 New Year’s Resolutions for Homeowners

Heading into a new year, we feel an obligation to make resolutions.

Personal resolutions can be motivating, exciting or just plain silly. This year I will… eat healthier, save money, run the Long Branch 5K, learn to surf in Monmouth Beach, do the Asbury Park Polar Bear Plunge.

As a homeowner, resolutions can also be empowering. Some are mission-critical for a solid financial year, others maybe fall in the wish list.

Need ideas?  This list should get you started:

1. “Lose weight.”
Losing the weight of excess possessions save time (you know, like looking everywhere for your shoes in a cluttered bedroom), money (where did I put that bill?) and your mind (psychologists agree that clutter and stress go hand-in-hand).

2. Get organized.
The logical next step to decluttering is to find a logical place for what’s left.

Need inspiration? Walk through a home storage store or get yourself on Pinterest for some seriously clever organizational ideas.

RELATED: 7 Clever Weighs to Hide Things in Plain Sight

3. Save energy.
Saving energy is good for the planet and it’s also great for your pocketbook. EnergyStar appliances are just the start.

• LED bulbs are much more efficient and now come in warmer tones and dimmable options for a more homey feel. Use a lighting calculator to measure energy and cost savings.
• Water heaters expend energy storing hot water. The Department of Energy says tankless water heaters are 8 percent to 34 percent more energy efficient than standard water heaters, depending on usage.
• Going solar no longer has to be ugly roof additions. Have you seen the new Tesla solar tiles?

Saving on energy can even have some great tax implications! Check out our article on the best energy enhancements for optimal tax write-offs.

4. Build green.
Going green is more than energy usage. It’s also about sustainability and healthful choices in finishes.

• Change out laminates and carpets for natural hard surfaces.
• Remove asbestos (with a professional).
• Use sustainable and recycled materials like bamboo, cork and Vetrazzo.
• Need to paint? Go with a low- or no-VOC non-toxic paint.
• If you’re texturizing a wall, try Earth plaster instead of gypsum.

5. Get healthy.
Create a workout space, so there’s no excuse when the weather turns. If you’re looking to move, check out neighborhoods with nearby trails, fitness centers and amenities.

RELATED: How to Choose the Perfect Neighborhood for you and your Family

6. Just fix it.
You’ve walked by that broken switch plate how many times?

Go through the house like a home inspector and create a checklist of repairs that need to be done. When it comes time to sell and appraise your house, you’ll be glad these were done.

RELATED: The Benefit of An Advance Home Inspection

7. Set yourself (debt) free.
Those who carry debt and struggle to pay it off are twice as likely to develop mental health problems, according to a study by John Gathergood of the University of Nottingham.

Paying off debt sets you free in so many ways, plus it’s great for your credit score. Think of all the things you could do in the future with the money you save on payments and interest (maybe even pay off your home early — see #20).

8. Remodel right.
Is it time to update a dated bathroom? Replace the garage door?

If you’re wondering what improvements will lead to a better return on investment when you sell, check out our article on which home renovations offer the greatest return on investment. Our Agent’s can also tell you what improvements are best for your neighborhood and house type.

A recent Zillow study showed that Americans spent more time researching a car purchase than their home loan. Since the Fed announced that it’s planning three rate hikes in 2017, it’s wise to refi sooner than later.

Have you reached the loan-to-value needed to remove your mortgage insurance? Make an appointment to talk to a lender for a mortgage checkup.

10. Learn to DIY.
The more minor fixes (and if you’re really skilled, major fixes) you can do yourself, the more money you save.

Thanks to YouTube, there are a lot of great how-tos. Other great sites include Instructables, How Stuff Works, Do It Yourself and myriad home improvement shows/channels.

11. Plan to maintain.
Create a maintenance calendar to remember those routine maintenance tasks, such as replacing furnace air filters, changing smoke detector batteries and winterizing sprinklers.

Whether it’s a paper calendar or your iCal on your phone, plan out scheduled maintenance so you won’t hear that relentless beeping of the smoke detector in the middle of the night — or run out of propane before the steaks are done (tragedy!).

12. Invest.
Is this the year to buy a rental property? Or a vacation home?

This will really require you to understand your financial situation, so talk to your financial advisor and an Agent who understands investment properties.

13. Take an inventory.
That new flat screen television and 360 viewer you got for Christmas are going to need coverage. If disaster happens, do you really know what’s in your house?

At minimum, make a list and save it on the cloud. Sites like Know Your Stuff and DocuHome help you document items in a room by tagging pics.

14. Do the double check.
The Insurance Information Institute says a standard policy covers the structure and possessions against fire, hurricanes, wind, hail, lightning, theft and vandalism.

Most other disasters are add-ons. Talk to your insurance agent and make sure you have not only enough property coverage but also enough liability coverage.

15. Get a “CLUE”.
Your homeowners’ insurance premiums are dependent on a number of factors, such as credit score and the Comprehensive Loss Underwriting Exchange (CLUE) report of claim history.

You can request a free report from LexisNexis.

Get involved with your local HOA, neighborhood watch or community events. The first step to a better neighborhood is your personal involvement.

For news, information about issues that effect your community and to keep in touch with your neighbors; you can also join the Community Facebook Pages and Group we maintain. Like the Bradley Beach, New Jersey Facebook Page or join the Groups for Bradley Beach, NJ Residents, Ocean Township, NJ Residents or our Jersey Shore and Monmouth County Lifestyle Group.

17. Save water.
Dry climate areas struggle for water in dense population centers. Watering restrictions can turn your grass brown and overuse can cost you with tiered billing. Even the New Jersey climates experience seasonal droughts or below average reservoir levels.

Xeriscape what you can outside and look for indoor appliances that use less water. If you live in a state with conservation legislation, get those regulators on your shower heads and hoses.

18. Get dirty.
Landscaping is essential to curb appeal. So this year, really plan to keep up with it or think about going to a more easy-care style.

RELATED: Enhance the Value of Your Home with Landscaping

Out back, consider a garden to save money on better produce. Get a composter for garden and food waste.

19. Plan for emergencies.
Natural disasters and social disruptions are unwanted, but they happen. To be ready, you actually need to prepare!

Do you have a family evacuation plan? Emergency supplies? Go to ready.gov for a ton of ideas on prevention and disaster preparedness.

20. Get smart.
Smart home features make your home more efficient and easy to use, even remotely. Look for these to be the “wow” factor that could make your house stand out. Who doesn’t love Alexa-enabled appliances?

RELATED: Increasing the Value of Your Home with These Most Popular Smart Home Accessories

21. Make extra mortgage payments.
You can take thousands of dollars and years off your mortgage by putting an extra amount towards the principal each month. For a \$400,000 at 4.25 percent interest with 25 of its 30 years left, you could save \$21,107 and take two years off by paying an extra \$100 per month.

RELATED: How To Pay Your Mortgage Off Early

What could you save? Try Bankrate’s handy extra payment calculator.

22. Pay off your second mortgage.
Whether it’s a one- or multiple-year plan, it won’t happen if you don’t budget for it.

If you live in an area where your home value has dropped since the last assessment, you need to really look at that bill.

Is the assessment correct? Is it going up faster than the sale prices of comparable homes? You can appeal via your local appraisal review board.

If you’re a first-time homeowner, you’re going to enjoy those new deductions. Be sure to talk to your tax advisor about adjusting your paycheck withholding accordingly (unless you like Uncle Sam making money off your income instead of you!).

RELATED: Check Out Patrick Parker Realty’s Annual Tax Season Blog Series Articles and Resources

25. Pay bills, especially your mortgage, on time.
It goes a long way to improving your credit. “The longer bills are paid on time, the higher the FICO Score should rise,” says myFICO. “That’s because as recent “good payment” patterns appear on a credit report, the impact of past credit problems on a FICO Score fade.”

26. Cook dinner.
You know that fabulous kitchen you had to have when you bought your home? Use it!

The USDA’s 2016-17 Food Price Outlook shows the price of groceries decreased in 2016, with a less than 1.5 percent increase in 2017, but restaurants will continue to climb beyond 2016’s 2.4 percent increase.

You’ll also eat healthier at home by controlling what goes into your body. If you own a home with a less-than-stellar kitchen, cooking will probably motivate you to make some appliance and feature upgrades that will pay off when you sell.

27. Get hip.

Although we’re still in a “sellers’ market” that will likely change in the next few years. A modern home (unless it’s a historic property) is simply more appealing and makes the buyer feel like it’s move-in ready.

Here’s to a healthier, happier and successful New Year!

## . Best Practices for Paying Off Your Mortgage

It’s simple to pay off a mortgage earlier.  But should you?  It’s a complicated question.

Let’s discuss why…

For many people, their mortgage carries an interest rate that’s lower than they could average in retirement or investment accounts. And that means the “extra” money you could throw at a mortgage might actually earn you a lot more elsewhere.

With a low mortgage interest rate, homeowners are “so much better off putting that money in a Roth IRA,” says Jill Gianola, CFP professional, author of “The Young Couple’s Guide to Growing Rich Together.”

Other financial pros agree. And if you have extra money and an employer that offers matching retirement contributions, that option might give you a higher return for your money than paying off a low-rate mortgage, says Eric Tyson, author of “Personal Finance for Dummies.”

RESOURCE: Start by using Bankrate’s mortgage calculator

Then there’s the college aid factor. If you’re applying for need-based aid for your kids, that home equity could count against you with some colleges, he says, because some institutions view equity as money in the bank.

If, after those caveats, you want to pay off your mortgage early, here are 4 ways to make it happen:

1. Pay an extra 1/12th every month
Divide your monthly principal and interest by 12 and add that amount to your monthly payment. End result: 13 payments a year.

IMPORTANT NOTE: Before you make anything beyond the regular payment, phone your mortgage servicer and find out exactly what you need to do so that your extra payments will be correctly applied to your loan.

Let them know you want to pay “more aggressively,” and ask the best ways to do that.

Some servicers may require a note with the extra money or directions on the notation line of the check.

And to confirm, if you’re putting extra money toward your loan, always check the next statement to make sure it’s been properly applied.

2. Refinance with a shorter-term mortgage
Want to make sure your mortgage is paid in 15 years? Refinance to a 15-year mortgage.

15-year mortgages often carry interest rates a quarter of a percentage point to three-quarters of a percentage point lower than their 30-year counterparts.

But this option is not quick or free. You must qualify for a new mortgage – which means paperwork, a credit check, and, likely, a home appraisal. Plus closing costs.

So do your research about refinance costs before jumping in… even with a lower interest rate, that quicker payoff means higher monthly payments. And this method is a lot less flexible. If you decide that you don’t have the extra money one month to put toward the mortgage, you’re locked in anyway.

Ultimately, unless the new interest rate is lower than the old rate, there’s no point in refinancing. Without a lower rate, you’ll get all the same benefits (and none of the extra costs) by just increasing your payment a sufficient amount.

3. Make an extra mortgage payment every year
12 months, 13 payments. There are a couple of ways to pull off this tactic. You can save up throughout the year and make an extra payment. Or, for those who get paid biweekly, harness part or all of those “extra” or “third” checks.

Get a bonus? A tax refund? An unexpected windfall? However it ends up in your hands, you can funnel some or all of your newfound money toward your mortgage.

The upside: You’re paying extra only when you’re flush. And those additional payments toward the principal will cut the total interest on your loan.

The downside: It’s irregular, so it’s hard to predict the mortgage payoff date. If you throw too much at the mortgage, you won’t have money for other needs.

So yes, whether you should pay off your mortgage early it’s a complicated question. But it does not mean without the proper research you can’t come to an answer.

Have you used any of the above methods to start paying your mortgage off early? What is working for you?

And don’t forget to subscribe to the monthly Patrick Parker Realty email newsletter for articles like these delivered straight to your inbox!

From the Patrick Parker Realty Tax Season Blog Series:
Tax Tips for Short Sales

Understanding how a short sale or restructure will be viewed by the Internal Revenue Service can help you plan your tax situation ahead of time.

If you are in a position where you have to sell your house for less than the amount you owe on it or have to restructure your mortgage with the lender in order to avoid foreclosure proceedings, you may face tax implications on the transaction. Understanding how a short sale or restructure will be viewed by the Internal Revenue Service can help you plan your tax situation ahead of time.

What is a short sale?
A short sale happens when you sell your property for less than what you owe on its mortgage(s). A short sale has to be approved by your lender because it will not receive the full amount of the outstanding loans.

After the sale, the loan will still have an unpaid balance, called the deficiency. Depending on the lender and the laws of your state, a short sale can result either in you owing the deficiency to the lender as unsecured debt, or in the lender forgiving the deficiency. A short sale is often negotiated as an alternative to foreclosure, as it often involves fewer costs and fees.

Tax implications of forgiven debt
If your lender forgives the balance of your mortgage after the short sale, you may not be out of the woods yet. You may have to include the forgiven debt as taxable income in the year of the short sale. The Mortgage Forgiveness Debt Relief Act of 2007 exempted that income through 2014 from taxation, up to \$2 million, if it was your principal residence, or main home. However, the tax still applies to second or vacation houses as well as rental properties. Beginning in 2015, the exemption is no longer available unless it is reinstated.

Mortgage restructuring
Before seeking a short sale or being forced into a foreclosure, you may be able to negotiate a mortgage restructuring to allow you to stay in your home and to be more able to afford your mortgage’s terms and interest rate. These types of loan modifications can take many forms and may include:

• Reduced interest rates
• A reduction of the loan principal
• Stretching out the payments over a longer time frame to make payments smaller

Of these options, only a principal reduction may have income tax implications. The principal reduction may be considered taxable income to you in the year of the restructure. If the property is your main home, it will fall under the provisions of the Mortgage Forgiveness Debt Relief Act and will be excluded from taxable income.

Dealing with incorrect 1099-C forms
If your lender has reduced or eradicated your debt under a short sale or mortgage restructure, it will send you IRS Form 1099-C at the end of the year, showing the amount of the debt forgiven and the fair market value of the property. Review the document carefully and compare it to your own figures. If it contains misstatements, contact the lender and attempt to have it correct the form. If it is not able, or not willing, to do that in a timely manner, recalculate the correct figures and provide the IRS with documentation showing how you arrived at your figures when you file your income tax return.

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

_____________________________________________________________________

The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

From the Patrick Parker Realty Tax Season Blog Series:
Deducting Mortgage Interest FAQs

If you’re a homeowner, you probably qualify for a deduction on your home mortgage interest. The tax deduction also applies if you pay interest on a condominium, cooperative, mobile home, boat or recreational vehicle used as a residence.

It pays to take mortgage interest deductions
If you itemize, you can usually deduct the interest you pay on a mortgage for your main home or a second home, but there are some restrictions.

1. What counts as mortgage interest?
2. Is my house a home?
3. Who gets to take the deduction?
4. Is there a limit to the amount I can deduct?
5. What if my situation is special?
6. What types of loans get the deduction?
7. What if I refinanced?
8. What kind of records do I need?

What counts as mortgage interest?
Mortgage interest is any interest you pay on a loan secured by a main home or second home.

These loans include:

• A second mortgage
• A line of credit
• A home equity loan

If the loan is not a secured debt on your home, it is considered a personal loan, and the interest you pay usually isn’t deductible.

Your home mortgage must be secured by your main home or a second home. You can’t deduct interest on a mortgage for a third home, a fourth home, etc.

Is my house a home?
For the IRS, a home can be a house, condominium, cooperative, mobile home, boat, recreational vehicle or similar property that has sleeping, cooking and toilet facilities.

Who gets to take the deduction?
You do, if you are the primary borrower, you are legally obligated to pay the debt and you actually make the payments. If you are married and both you and your spouse sign for the loan, then both of you are primary borrowers. If you pay your son’s or daughter’s mortgage to help them out, however, you cannot deduct the interest unless you co-signed the loan.

Is there a limit to the amount I can deduct?
Yes, your deduction is generally limited if all mortgages used to buy, construct, or improve your first home (and second home if applicable) total more than \$1 million (\$500,000 if you use married filing separately status).

You can also generally deduct interest on home equity debt of up to \$100,000 (\$50,000 if you’re married and file separately) regardless of how you use the loan proceeds.

For details, see IRS Publication 936: Home Mortgage Interest Deduction.

What if my situation is special?
Here are a few special situations you may encounter.

• If you have a second home that you rent out for part of the year, you must use it for more than 14 days or more than 10 percent of the number of days you rented it out at fair market value (whichever number of days is larger) for the home to be considered a second home for tax purposes. If you use the home you rent out for fewer than the required number of days, your home is considered a rental property, not a second home.
• You may treat a different home as your second home each tax year, provided each home meets the qualifications noted above.
• If you live in a house before your purchase becomes final, any payments you make for that period of time are considered rent. You cannot deduct those payments as interest, even if the settlement papers label them as interest.
• If you used the proceeds of a home loan for business purposes, enter that interest on Schedule C if you are a sole proprietor, and on Schedule E if used to purchase rental property. The interest is attributed to the activity for which the loan proceeds were used.
• If you own rental property and borrow against it to buy a home, the interest does not qualify as mortgage interest because the loan is not secured by the home itself. Interest paid on that loan can’t be deducted as a rental expense either, because the funds were not used for the rental property. The interest expense is actually considered personal interest, which is no longer deductible.
• If you used the proceeds of a home mortgage to purchase or “carry” securities that produce tax-exempt income (municipal bonds) , or to purchase single-premium (lump-sum) life insurance or annuity contracts, you cannot deduct the mortgage interest. (The term “to carry” means you have borrowed the money to substantially replace other funds used to buy the tax-free investments or insurance.).

What kinds of loans get the deduction?
If all your mortgages fit one or more of the following categories, you can generally deduct all of the interest you paid during the year.

• Mortgages you took out on your main home and/or a second home on or before October 13, 1987 (called “grandfathered” debt, because these are mortgages that existed before the current tax rules for mortgage interest took effect).
• Mortgages you took out after October 13, 1987 to buy, build or improve your main home and/or second home (called acquisition debt) that totaled \$1 million or less throughout the year (\$500,000 if you are married and filing separately from your spouse).
• Home equity debt you took out after October 13, 1987 on your main home and/or second home that totaled \$100,000 or less throughout the year (\$50,000 if you are married and filing separately). Interest on such home equity debt is generally deductible regardless of how you use the loan proceeds, including to pay college tuition, credit card debt, or other personal purposes. This assumes the combined balances of acquisition debt and home equity do not exceed the home’s fair market value at the time you take out the home equity debt.

If a mortgage does not meet these criteria, your interest deduction may be limited. To figure out how much interest you can deduct and for more details on the rules summarized above, see IRS Publication 936: Home Mortgage Interest Deduction.

What if I refinanced?
When you refinance a mortgage that was treated as acquisition debt, the balance of the new mortgage is also treated as acquisition debt up to the balance of the old mortgage. The excess over the old mortgage balance is treated as home equity debt. Interest on up to \$100,000 of that excess debt may be deductible under the rules for home equity debt. Also, you can deduct the points you pay to get the new loan over the life of the loan, assuming all of the new loan balance qualifies as either acquisition debt or home equity debt of up to \$100,000.

That means you can deduct 1/30th of the points each year if it’s a 30-year mortgage—that’s \$33 a year for each \$1,000 of points you paid. In the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted, unless you refinance with the same lender. In that case, you add the points paid on the latest deal to the leftovers from the previous refinancing and deduct the expense on a pro-rated basis over the life of the new loan.

What kind of records do I need?
In the event of an IRS inquiry, you’ll need the records that document the interest you paid. These include:

• Copies of Form 1098: Mortgage Interest Statement. Form 1098 is the statement your lender sends you to let you know how much mortgage interest you paid during the year and, if you purchased your home in the current year, any deductible points you paid.
• Your closing statement from a refinancing that shows the points you paid, if any, to refinance the loan on your property.
• The name, Social Security number and address of the person you bought your home from, if you pay your mortgage interest to that person, as well as the amount of interest (including any points) you paid for the year.
• Your federal tax return from last year, if you refinanced your mortgage last year or earlier, and if you’re deducting the eligible portion of your interest over the life of your mortgage.

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

_____________________________________________________________________

The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The
Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

From the Patrick Parker Realty Tax Season Blog Series:

Buying your first home is a huge step, but tax deductions available to you as a homeowner can reduce your tax bill.

Tax breaks ease the cost of mortgage
Buying a home is when you begin building equity in an investment instead of paying rent. And Uncle Sam is there to help ease the pain of high mortgage payments. The tax deductions now available to you as a homeowner will reduce your tax bill substantially.

If you have been claiming the standard deduction up until now, the extra write-offs from owning a home almost certainly will make you an itemizer. Suddenly, the state taxes you pay and your charitable donations will earn you tax-saving deductions, too.

So make sure you know about all these breaks covered here that may now be available to you:

• Mortgage interest
• Points
• Real estate taxes
• Penalty-free IRA payouts for first-time buyers
• Home improvements
• Energy credits
• Tax-free profit on sale
• Home equity loans

Mortgage interest
For most people, the biggest tax break from owning a home comes from deducting mortgage interest. You can deduct interest on up to \$1 million of debt used to acquire or improve your home.

Your lender will send you Form 1098 in January listing the mortgage interest you paid during the previous year. That is the amount you deduct on Schedule A. Be sure the 1098 includes any interest you paid from the date you closed on the home to the end of that month. This amount is listed on your settlement sheet for the home purchase. You can deduct it even if the lender does not include it on the 1098. If you are in the 25 percent tax bracket, deducting the interest basically means Uncle Sam is paying 25 percent of it for you.

Points
When you buy a house, you may have to pay “points” to the lender in order to get your mortgage. This charge is usually expressed as a percentage of the loan amount. If the loan is secured by your home and the amount of points you pay is typical for your area, the points are deductible as interest as long as the cash you paid at closing via your down payment equals the points.

For example, if you paid two points (2%) on a \$300,000 mortgage—\$6,000—you can deduct the points as long as you put at least \$6,000 of your own cash into the deal. And believe it or not, you get to deduct the points even if you convinced the seller to pay them for you as part of the deal. The deductible amount should be shown on your 1098 form.

Real estate taxes
You can deduct the local property taxes you pay each year, too. The amount may be shown on a form you receive from your lender, if you pay your taxes through an escrow account. If you pay them directly to the municipality, though, check your records or your checkbook registry. In the year you purchased your residence, you probably reimbursed the seller for real estate taxes he or she had prepaid for time you actually owned the home.

If so, that amount will be shown on your settlement sheet. Include this amount in your real estate tax deduction. Note that you can’t deduct payments into your escrow account as real estate taxes. Your deposits are simply money put aside to cover future tax payments. You can deduct only the actual real estate tax amounts paid out of the account during the year.

Buyers who make a down payment of less than 20 percent of a home’s cost usually get stuck paying premiums for Private Mortgage Insurance, which is an extra fee that protects the lender if the borrower fails to repay the loan. For mortgages issued in 2007 or after, home buyers can deduct PMI premiums.

This write-off phases out as adjusted gross income increases above \$50,000 on married filing separate returns and above \$100,000 on all other returns. (If you’re paying PMI on a mortgage issued before 2007, you’re out of luck on this one.) The PMI write-off is set to expired at the end of 2014, although Congress may extend it into future years.

Penalty-free IRA payouts for first-time buyers
As a further incentive to homebuyers, the normal 10 percent penalty for pre-age 59½ withdrawals from traditional IRAs does not apply to first-time home buyers who break into their IRAs to come up with the down payment. This exception to the 10 percent penalty does not apply to withdrawals from 401(k) plans.

But get this: You don’t really have to be a first-time homebuyer to qualify. You’re considered a first-timer as long as you haven’t owned a home for two years. Sounds great, but there’s a serious downside. Although the 10 percent penalty is waived, the money would still be taxed in your top bracket (except to the extent it was attributable to nondeductible contributions). That means as much as 40 percent or more of the \$10,000 could go to federal and state tax collectors rather than toward a down payment. So you should tap your IRA for a down payment only if it is absolutely necessary.

There’s a Roth IRA corollary to this rule, too. The way the rules work make the Roth IRA a great way to save for a first home. First of all, you can always withdraw your contributions to a Roth IRA tax-free (and usually penalty-free) at any time for any purpose. And once the account has been open for at least five years, you can also withdraw up to \$10,000 of earnings for a qualifying first home purchase without any tax or penalty.

Home improvements
Save receipts and records for all improvements you make to your home, such as landscaping, storm windows, fences, a new energy-efficient furnace and any additions.

You can’t deduct these expenses now, but when you sell your home the cost of the improvements is added to the purchase price of your home to determine the cost basis in your home for tax purposes. Although most home-sale profit is now tax-free, it’s possible for the IRS to demand part of your profit when you sell. Keeping track of your basis will help limit the potential tax bill.

Energy credits
Some energy-saving home improvements to your principal residence can earn you an additional tax break in the form of an energy tax credit worth up to \$500. A tax credit is more valuable than a tax deduction because a credit reduces your tax bill dollar-for-dollar.

You can get a credit for up to 10 percent of the cost of qualifying energy-efficient skylights, outside doors and windows, insulation systems, and roofs, as well as qualifying central air conditioners, heat pumps, furnaces, water heaters, and water boilers.

There is a completely separate credit equal to 30 percent of the cost of more expensive and exotic energy-efficient equipment, including qualifying solar-powered generators and water heaters. In most cases there is no dollar cap on this credit.

Tax-free profit on sale
Another major benefit of owning a home is that the tax law allows you to shelter a large amount of profit from tax if certain conditions are met. If you are single and you owned and lived in the house for at least two of the five years before the sale, then up to \$250,000 of profit is tax-free. If you’re married and file a joint return, up to \$500,000 of the profit is tax-free if one spouse (or both) owned the house as a primary home for two of the five years before the sale, and both spouses lived there for two of the five years before the sale.

Thus, in most cases, taxpayers don’t owe any tax on the home-sale profit. (If you sell for a loss, you cannot take a deduction for the loss.)

You can use this exclusion more than once. In fact, you can use it every time you sell a primary home, as long as you owned and lived in it for two of the five years leading up to the sale and have not used the exclusion for another home in the last two years. If your profit exceeds the \$250,000/\$500,000 limit, the excess is reported as a capital gain on Schedule D.

In certain cases, you can treat part or all of your profit as tax-free even if you don’t pass the two-out-of-five-year tests. A partial exclusion is available if you sell your home “early” because of a change of employment, a change of health, or because of other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy.

A partial exclusion means you get part of the \$250,000/\$500,000 exclusion. If you qualify under one of the exceptions and have lived in the house for one of the five years before the sale, for example, you can exclude up to \$125,000 of profit if you’re single or \$250,000 if you’re married—50 percent of the exclusion of those who meet the two-out-of-five-year test.

Home equity loans
When you build up enough equity in your home, you may want to borrow against it to finance an addition, buy a car or help pay your child’s college tuition. As a general rule you can deduct interest on up to \$100,000 of home-equity debt as mortgage interest, no matter how you use the money.

If your new home will increase the size of your mortgage interest deduction or make you an itemizer for the first time, you don’t have to wait until you file your tax return to see the savings. You can start collecting the savings right away by adjusting your federal income tax withholding at work, which will boost your take-home pay. Get a W-4 form and its instructions from your employer or go to www.irs.gov.

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

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The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

Navigating Short Sales: What to Do When the Sale Price Leaves You Short

If you’re thinking of selling your home, and you expect that the total amount you owe on your mortgage will be greater than the selling price of your home, you may be facing a short sale. A short sale is one where the net proceeds from the sale won’t cover your total mortgage obligation and closing costs, and you don’t have other sources of money to cover the deficiency. A short sale is different from a foreclosure, which is when your lender takes title of your home through a lengthy legal process and then sells it.

1. Consider loan modification first

• Your property is worth less than the total mortgage you owe on it.
• You have a financial hardship, such as a job loss or major medical bills.
• You have contacted your lender and it is willing to entertain a short sale.

2. Hire a qualified team

The first step to a short sale is to hire a qualified real estate professional and a real estate attorney who specialize in short sales. Interview at least three candidates for each and look for prior short-sale experience. Short sales have proliferated only in the last few years, so it may be hard to find practitioners who have closed a lot of short sales. You want to work with those who demonstrate a thorough working knowledge of the short-sale process and who won’t try to take advantage of your situation or pressure you to do something that isn’t in your best interest. A qualified real estate professional can:

• Provide you with a comparative market analysis (CMA) or broker price opinion (BPO).
• Help you set an appropriate listing price for your home, market the home, and get it sold.
• Put special language in the MLS that indicates your home is a short sale and that lender approval is needed (all MLSs permit, and some now require, that the short-sale status be disclosed to potential buyers).
• Ease the process of working with your lender or lenders.
• Negotiate the contract with the buyers.
• Help you put together the short-sale package to send to your lender (or lenders, if you have more than one mortgage) for approval. You can’t sell your home without your lender and any other lien holders agreeing to the sale and releasing the lien so that the buyers can get clear title.

3. Begin gathering documentation before any offers come in

Your lender will give you a list of documents it requires to consider a short sale. The short-sale “package” that accompanies any offer typically must include:

• A hardship letter detailing your financial situation and why you need the short sale
• A copy of the purchase contract and listing agreement
• Proof of your income and assets
• Copies of your federal income tax returns for the past two years

4. Prepare buyers for a lengthy waiting period

Even if you’re well organized and have all the documents in place, be prepared for a long process. Waiting for your lender’s review of the short-sale package can take several weeks to months. Some experts say:

• If you have only one mortgage, the review can take about two months.
• With a first and second mortgage with the same lender, the review can take about three months.
• With two or more mortgages with different lenders, it can take four months or longer.
• When the bank does respond, it can approve the short sale, make a counteroffer, or deny the short sale. The last two actions can lengthen the process or put you back at square one. (Your real estate attorney and real estate professional, with your authorization, can work your lender’s loss mitigation department on your behalf to prepare the proper documentation and speed the process along.)

5. Don’t expect a short sale to solve your financial problems

Even if your lender does approve the short sale, it may not be the end of all your financial woes. Here are some things to keep in mind:

• You may be asked by your lender to sign a promissory note agreeing to pay back the amount of your loan not paid off by the short sale. If your financial hardship is permanent and you can’t pay back the balance, talk with your real estate attorney about your options.
• Any amount of your mortgage that is forgiven by your lender is typically considered income, and you may have to pay taxes on that amount. Under a temporary measure passed in 2007, the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act, homeowners can exclude debt forgiveness on their federal tax returns from income for loans discharged in calendar years 2007 through 2012. Be sure to consult your real estate attorney and your accountant to see whether you qualify.
• Having a portion of your debt forgiven may have an adverse effect on your credit score. However, a short sale will impact your credit score less than foreclosure and bankruptcy.

4 Tips for Spring Cleaning Your Finances

Something about spring inspires us to clean up our environment, from our homes and offices to our finances. It’s a great time to think about your finances and what you can do to manage them better.

Here are four tips for spring cleaning your credit:

Do you carry credit cards that you never use? Credit cards sitting in your wallet may tempt you to overspend, so store them in a safe place rather than carry them with you. Don’t, however, automatically assume you should just cancel a card you don’t use. Closing an account affects your ratio of credit available to credit used – a factor that helps determine your credit score. Before you make a credit move of any kind, you can use tools such as the freecreditscore.com Score Planner, which is available to everyone, to better understand how your action might affect your credit.

Late or missed payments can pull down your credit score. Clean up this part of your credit by automating bill payment. Many creditors now allow you to sign up for online billing that will not only deliver your monthly statement to your inbox, but alert you when a bill is coming due or becomes past due. Most also offer automatic payment options that allow you to choose a date on which to have payments automatically withdrawn from your bank account every month. Automation is a great way to ensure you never miss a scheduled payment.

3. Review your credit report and score

Check your credit report for errors and take steps to correct any that you find. If your score is lower than you would like, you can then start to take steps to improve your credit score.  Learn more in our blog post 9 Fast Fixes For Your Credit Score.

4. Pay down debt

Debt is costly. By reducing your debt, you’ll lower the amount of money you waste paying interest. There are two schools of thought for paying down debt, and either can work for you. There are different strategies for paying down debt. One philosophy says to get rid of the highest interest debt first since that costs you the most money every month. On the other hand, choosing to focus your pay-off efforts on the smallest amount of debt – say that credit card that you owe \$1,000 on – can help you reduce debt faster. Plus, you’ll get the sense of accomplishment that comes with paying off a debt. Decide which route works best for you, and create a payment plan as part of spring cleaning your credit. Figure out what works best for you and manage your credit card debt as an ongoing project.

What have you done to spring clean your finaces?  How have you gotten your credit in check?  What challenges have you met along the way?  Leave your feedback in Comments, on Facebook or Twitter and don’t forget to subscribe to the Patrick Parker Realty monthly eNewsletter for more tips, guides and articles like this delivered straight to your inbox.

9 Fast Fixes For Your Credit Score

So you’ve had a few problems getting the bills paid lately, and you’re wondering what you can do to repair the damage to your credit.

If your credit scores are below 760, you may not be getting the best rates for loans, credit cards, insurance and more – so doing some credit repair can save you money.

And don’t worry, you’ve got plenty of company. Tens of millions of people in the United States have credit blemishes severe enough (and FICO credit scores under 620) to make obtaining loans and credit cards with reasonable terms difficult.

Or maybe your credit is OK, but you’d like to make it better. After all, the better your credit, the less you pay in interest and, typically, for insurance.

To improve your credit scores, it’s important to know where you stand now. You can get free credit reports once a year, but you typically have to pay to see your FICO scores.

You can buy two of your three FICO scores for \$19.95 each at myFICO. (One of the three credit bureaus, Experian, no longer sells FICO scores to consumers, although it still sells them to lenders.)

If your scores are above 760, you’re probably already getting the best rates. If they’re anywhere below that mark, though, they could stand some improvement.

So here are the nine steps you can take to speedy credit repair:

1. Get a credit card if you don’t have one
Don’t fall for the myth that you have to carry a balance to have good scores. You don’t, and you shouldn’t. But having and using a credit card or two can really build your scores.

If you can’t qualify for a regular credit card, consider a secured credit card, where the issuing bank gives you a credit line equal to the deposit you make. Look for a card that reports to all three credit bureaus.

2. Add an installment loan to the mix
You’ll get the fastest improvement in your scores if you show you’re responsible with both major kinds of credit: revolving (credit cards) and installment (personal loans, auto, mortgages and student loans).

If you don’t already have an installment loan on your credit reports, consider adding a small personal loan that you can pay back over time. Again, you’ll want the loan to be reported to all three bureaus, and you’ll probably get the best deal from a community bank or credit union.

3. Pay down your credit cards
Paying off your installment loans (mortgage, auto, student, etc.) can help your scores but typically not as dramatically as paying down — or paying off — revolving accounts such as credit cards.

Lenders like to see a big gap between the amount of credit you’re using and your available credit limits. Getting your balances below 30% of the credit limit on each card can really help; getting balances below 10% is even better.

Though most debt gurus recommend paying off the highest-rate card first, a better strategy here is to pay down the cards that are closest to their limits.

Racking up big balances can hurt your scores, regardless of whether you pay your bills in full each month. What’s typically reported to the credit bureaus, and thus calculated into your scores, are the balances reported on your last statements.

You often can increase your scores by limiting your charges to 30% or less of a card’s limit; 10% is even better. If you’re having trouble keeping track, you can set up email or text alerts with your credit card companies to let you know when you’re approaching a limit you’ve set. If you regularly use more than half your limit on a card, consider using other cards to ease the load or try making a payment before the statement closing date to reduce the balance that’s reported to the bureaus. Just be sure to make a second payment between the closing date and the due date, so you don’t get reported as late.

Your scores might be artificially depressed if your lender is showing a lower limit than you actually have. Most credit card issuers will quickly update this information if you ask.

If your issuer makes it a policy not to report consumers’ limits, however – as is sometimes the case with “no preset spending limit” cards – the bureaus may use your highest balance as a proxy for your credit limit.

You may see the problem here: If you consistently charge the same amount each month — say, \$2,000 to \$2,500 — it may look to the credit-scoring formula like you’re regularly maxing out that card.

If you have an American Express charge card — the kind that must be paid in full every month, rather than the kind on which you carry a balance — you probably don’t have to worry, because charge cards typically aren’t included in the credit utilization portion of the FICO formula.

If, however, the card is categorized on your credit reports not as a charge card but as a revolving credit card, and either a credit limit or high balance is reported to the bureaus, your balances on the card could be a problem.

You could go on a wild spending spree to raise the high balance reported to the credit bureaus, but a more sober solution would simply be to pay your balance down or off before your statement period closes.

6. Dust off an old card
The older your credit history, the better. But if you stop using your oldest cards, the issuers may decide to close the accounts or stop updating them to the credit bureaus. The accounts may still appear, but they won’t be given as much weight in the credit-scoring formula as your active accounts, said Craig Watts, an executive at Fair Isaac, the company that created the FICO score.

So you might want to charge a recurring bill to one of those little-used accounts or take them out for dinner and a movie occasionally — always, of course, paying off the balance in full.

7. Get some goodwill
If you’ve been a good customer, a lender might agree to simply erase that one late payment from your credit history. You usually have to make the request in writing, and your chances for a “goodwill adjustment” improve the better your record with the company (and the better your credit in general). But it can’t hurt to ask.

A longer-term solution for more-troubled accounts is to ask that they be “re-aged.” If the account is still open, the lender might erase previous delinquencies if you make a series of 12 or so on-time payments.

8. Dispute old negatives
Say that fight with your phone company over an unfair bill a few years ago resulted in a collections account. You can continue protesting that the charge was unjust, or you can try disputing the account with the credit bureaus as “not mine.” The older and smaller a collection account, the more likely the collection agency won’t bother to verify it when the credit bureau investigates your dispute.

Some consumers also have had luck disputing old items with a lender that has merged with another company, which can leave lender records a real mess.

9. Blitz significant errors
Your credit scores are calculated based on the information in your credit reports, so certain errors there can really cost you. But not everything that’s reported in your files matters to your scores.

Here’s the stuff that’s usually worth the effort of correcting with the bureaus:

• Late payments, charge-offs, collections or other negative items that aren’t yours.
• Credit limits reported as lower than they actually are.
• Accounts listed as “settled,” “paid derogatory,” “paid charge-off” or anything other than “current” or “paid as agreed” if you paid on time and in full.
• Accounts that are still listed as unpaid that were included in a bankruptcy.
• Negative items older than seven years (10 in the case of bankruptcy) that should have automatically fallen off your reports.

You actually have to be a bit careful with this last one, because sometimes scores actually go down when bad items fall off your reports. It’s a quirk in the FICO credit-scoring software, and the potential effect of eliminating old negative items is difficult to predict.

Some of the stuff that you typically shouldn’t worry about includes:

• Various misspellings of your name.
• Outdated or incorrect address information.
• An old employer listed as current.
• Most inquiries.

If the misspelled name or incorrect address is because of identity theft or because your file has been mixed up with someone else’s, that should be obvious when you look at your accounts. You’ll see delinquencies or accounts that aren’t yours and should report that immediately. However, if it’s just a goof by the credit bureau or one of the companies reporting to it, it’s usually not worth sweating.

Two more items you don’t need to correct:

• Accounts you closed listed as being open.
• Accounts you closed that don’t say “closed by consumer.”

Closing an account can’t help your scores and may hurt them. If your goal is boosting your scores, leave these alone. Once an account has been closed, though, it doesn’t matter to the scoring formulas who did it — you or the lender. If you messed up the account, it will be obvious from the late payments and other derogatory information included in the file.

Choosing Between Mortgage Broker and Bank

Disparaged by some as the bogeymen of the housing crash, mortgage brokers have taken a beating over the last few years.

With many having been dropped by the big banks in favor of in-house sales channels, and with their industry much more tightly regulated, brokers have seen their ranks so drastically thinned that, instead of controlling the origination market as they did a decade ago, they account for a slim 9.7 percent, according to Inside Mortgage Finance, an industry publication.

Yet mortgage brokers are still a worthwhile option for borrowers, who now have some protection from the shady practices of the past. New federal regulations forbid brokers to pocket premiums from lenders in return for steering customers into higher-priced, high-risk loans. And under the SAFE Mortgage Licensing Act of 2008, brokers have to pass state licensing exams in order to prove they know the rules of the financing game.

“The nice thing that the SAFE act has done is we’ve weeded out a lot of those bad people that everyone likes to talk about,” said Donald Frommeyer, the senior vice president of Amtrust Mortgage Funding in Carmel, Ind., and the president of the National Association of Mortgage Brokers.

Why a Broker?

A mortgage broker is basically a middleman. Brokers work with a variety of lenders to find loans for clients, but do not lend out money directly. That’s the role of a mortgage lender, the entity that supplies the funds going to the closing table. The lender could be a mortgage bank, which specializes in mortgages; it could be a large commercial bank, a community bank or a credit union. The largest mortgage lenders, by share of originations, according to the publication Mortgage Daily, are Wells Fargo, JPMorgan Chase and Bank of America. Ask a broker what he or she can offer that a bank can’t and the response will almost certainly be variety. Because brokers are not tied to any one lender, they have the ability to shop around on behalf of their clients. As Mr. Frommeyer explained, “I have 20 companies I can go to — everybody has a different program.”

In reality, these days, the variation in lenders’ products and rates is much more limited than in the era of easy credit. “When it comes to a 30-year fixed, the rate of pricing is pretty darn tight,” said Bob Walters, the chief economist for Quicken Loans, a major online mortgage lender. “We’re not talking about huge differences.”

But a borrower might still save time and irritation by having an experienced broker shop around for the best mortgage deal. Borrowers who might not be shoo-ins for a loan, perhaps because of lagging credit or other circumstances, might find that a broker with lots of lending contacts will have a good sense of what the financing possibilities are, if any.

Another plus for busy borrowers: Brokers handle the paperwork and interactions with lenders. And they may be able to head off problems. “The broker understands the guidelines of the lender, and has the chance to look at your information before it is sent to the lender,” said Tim Malburg, the president of the Capstone Mortgage Company, a brokerage in Wilton, Conn. “Anything that raises a red flag, I’m going to ask you about.”

None of this is to suggest that borrowers should blindly trust a single broker to work on their behalf. After all, brokers get paid by closing loans. The borrower might check with two or three.

Why a Bank?

If brokers offer clients variety, mortgage lenders have the advantage of control. Because the bank is the one lending the money, the bank makes the decisions. That can make a big difference in situations “when you need a small exception, or a subjective decision is needed,” said Mr. Walters of Quicken Loans. “A banker can say, ‘I’m going to fund this loan,’ while a broker might get jammed up.” Mistakes might also be resolved more quickly.

Borrowers who have a long-term relationship with a bank for other services might be offered favorable terms on a home loan. And they might find that some mortgage products, like “jumbo loans,” are available only through a bank. (A jumbo loan exceeds the conforming-loan limits set by Fannie Mae and Freddie Mac, which in New York City and other high-cost areas is \$625,500.)

Because the secondary market for mortgages has shrunk so markedly, “what’s happened is more of the mortgage products available are available only through banks that have the capacity to hold those loans on their balance sheet,” said Malcolm Hollensteiner, the director of retail lending sales at TD Bank.

For example, he said, although TD Bank can offer borrowers jumbo loans, brokers have far less access to jumbo products than they did before the housing crash.

Better to Compare

The bottom line is that borrowers should compare offerings from both brokers and banks (whether online or at a bricks-and-mortar location). Mr. Malburg of Capstone recommends contacting three or four mortgage sources, and keeping track of their interest rates, lock-in fees and points on a spreadsheet. (Try to stick with a specific kind of loan, like a 30-year fixed, to simplify your comparison.) Then, he said, narrow it down, and call back to get details about closing costs, including lender origination fees, and whether there is a prepayment penalty.

Keep in mind that interest rates change constantly, so you may find that rates are different when you call back. “You’re chasing a moving target,” Mr. Walters said.

When comparing loan costs, be sure to ask how the broker is being compensated. The broker fee is set as a percentage of the loan amount (1 to 2.5 percent is customary), and is paid either by the borrower or the lender. Brokers are required to disclose their fees upfront, and they are not permitted to earn any more than the disclosed amount. On a \$500,000 loan, a 1.5 percent broker fee would total \$7,500. If due from the borrower, it could either be rolled into the loan amount or paid upfront by check.

Mr. Walters urges borrowers to look beyond cost considerations and also pay attention to how the broker or loan officer responds to their request for information. “People say, ‘How do I know if I’m talking to a good mortgage banker?’ and I tell them, ‘It’s the person who asks you the most questions,’ ” he said. “Someone who is just quoting you rates, well, you might as well be buying gasoline.”

Source: The New York Times

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