Mortgage

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

Which Type of Mortgage Loan Meets Your Needs?

Few purchases during your lifetime will be as expensive as buying a home. Whether it’s your primary residence, a vacation home or an investment property, how you choose to pay for it can have a significant impact on your financial situation over time. If you’re considering a mortgage loan, understanding the main categories of mortgages — fixed-rate and adjustable-rate — and the situations they’re best designed for will help you match the right type for your needs.
Fixed-rate loans offer stabilityA fixed-rate mortgage, as its name suggests, is a loan whose interest rate remains constant for the life of the loan — typically 15 or 30 years. One of the primary benefits of a fixed-rate loan is that it provides a measure of certainty about one of the biggest expenses in your monthly budget. With interest rates likely to rise after an extended period of historically low rates, you won’t have to worry about potentially higher payments in the future if you select a fixed-rate loan.

That said, if interest rates were to fall again, your fixed-rate loan would leave you unable to take advantage of the shift unless you refinance, which might involve fees. You’re also paying a premium for the stability offered by a fixed-rate mortgage. You could consider a 15-year fixed-rate loan, which would charge a lower rate than a 30-year loan, but the tradeoff will be higher monthly payments.

ARMs provide flexibility

Adjustable-rate mortgages (ARMs) typically offer a fixed interest rate for an initial period of years. This rate, which is usually lower than that of a comparable fixed-rate mortgage, resets periodically based on a benchmark interest rate. For example, a 5/1 ARM means that your interest rate is fixed for the first five years and then will adjust every year after that.

Paying less interest in the beginning frees your cash for other investments. You might also take advantage of an ARM if you’re confident that you’ll have more money in the future than you do today, or if you plan on selling your house before or soon after the initial fixed-rate period expires. When considering an ARM, you’ll need to assess your ability to keep up with potentially higher payments — say, if the initial period expires, your rate goes up and you’re unable to sell the home, or if your income changes.

The best for you

The right loan type depends, naturally, on your financial position. But whether you’re buying a primary residence, vacation home or investment property also plays a role. Regardless of which type of home you’re purchasing, having a basic knowledge of the loan types can help ease the buying process. Let our firm assist you in evaluating the best mortgage for your needs.

Tax and Finance Tips for Buying a Home in Westchester County

Buying a home is a rewarding milestone that also comes with a great deal of tax and finance-related implications.

tips for buying a home in westchester county from westchester accountant paul herman

Get to know these helpful hints before buying a home in Westchester County!

As a homeowner in Westchester County, Westchester accountant and personal finance expert, Paul Herman knows first hand how to help ease the stress on your home buying experience in Westchester, and of course, save money in the process! Get to know these handy tips in Paul’s guest blog with Westchester NY real estate agency Prudential Centennial Realty here.

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Getting a Loan 101

Scarsdale tax preparer Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions! 

What are the advantages of prepaying a mortgage, and should I if I can? Tips from Scarsdale accountant on getting a loan

It is highly recommended that you prepay as much of your mortgage as possible every month, which will drastically reduce the total amount that you pay.

However there are times where this could be disadvantageous.

If you are in a situation where you don’t have funds to cover three to six months of expenses, it is recommended that you save that amount before you pay additional amounts on your mortgage.

If you have a large amount of credit card debt, over the long run, you will save more money by knocking down those high interest loans first.

There also may be times where that money would be more wisely invested in the market, depending on the expected rate of return versus how much you would save in early payments.

 Should I refinance?

In order to refinance your home, the current market rate should be at least 2 percentage points lower than what you are paying on your mortgage. Speak with a lender to see what rate you may be able to get. Remember to factor in costs like appraisals, points from the lender, and others, which may not be apparent in your initial price assessment.

After assessing that cost, get a quote of what your total payment would be after refinancing. The simplest way to find out how long it will take to recover the refinancing costs will be to divide your closing costs by the monthly savings with your new monthly payment.

Also take into consideration how long you plan on holding your home. It may not make sense to refinance the home if you plan on selling in the near future.

▼ Does borrowing against my securities make sense?

This could be a low-cost option for borrowing but there is some risk involved. Deductions are not allowed for the interest unless that loan is used to invest in a business.

▼ Can a Home Equity Line of Credit be beneficial?

A home equity line of credit is a form of credit which allows you to borrow and use your home as collateral. Since for many, a home is their greatest asset, they tend to use these sorts of credit lines for large things like a college education for their children, medical expenses or for large unexpected bills as opposed to luxuries or day to day expenses.

After receiving a home equity line, one is approved for an amount of credit, or a maximum that may be borrowed at any given time for the duration of the plan.

On many occasions a lender will set a credit limit on a home equity loan by setting a percentage, after considering the amount of the appraised value of the home and the amount owed on the home.

After the line of credit is approved, you will be able to borrow up to the set limit, usually in the form of checks. In some instances a borrower may be given credit cards to utilize, sometimes with minimum spending requirements.

▼ What costs are associated?

The costs associated with getting a home equity loan are basically the same as a refinance.

  • Appraisal
  • A non-refundable application fee
  • Up front points, which equal one percent of the entire credit limit
  • Closing costs, which are the same as the closing costs you would pay upon purchasing a home
  • Yearly fees and the possibility a transaction fee per draw

▼ How can you lock in an interest rate?

After choosing a lender, you may be quoted a rate, which may “float” until the actual closing, meaning that it is not guaranteed. With a lock-in you are guaranteed that the interest rate will not change before your closing. You may want to ask for an agreement that ensures that your rate is capped, but allows you to take advantage of a lower rate if the rate lowers before your close.

There is usually a time limit that a lender will put on this guarantee, and if you don’t close before that time, they no longer have to honor that lock-in. It is recommended that you stay in close contact with your loan officer during the process to ensure that you are able to close in a timely manner and get the locked-in rate.

▼ What disclosures should I get from my lender?

The lender is obligated by the Truth in Lending Act to provide you with a written statement with a list of all of the costs associated with the loan and the terms of financing. This statement must be delivered to you before the settlement.

If you want to rescind the loan, you may do so within 3 business days of the receipt of the Truth in Lending paperwork, receipt of cancellation notice, or your settlement, whichever was the most recent.

You will want to carefully review the disclosure that you are given before you sign. This disclosure will have all of the pertinent information about your loan, the finance charge, the amount financed, the payment schedule and the APR.

▼ How does a reverse mortgage work?

A reverse mortgage is a way for you to take advantage of some of the equity that is currently tied up in your home. A reverse mortgage works in the same manner as a normal one, reversed, and the homeowner is paid monthly versus having to pay. The major difference between this and a home equity loan is that you aren’t required to pay anything back to the lender as long as your retain ownership of the home.

The major benefit of a reverse mortgage is that it allows homeowners to take advantage of some of the equity that they have built up in their homes without the burden of having to pay it back in monthly payments. This could be used to supplement income, defray the cost of medical aid, pay for college education, stop a foreclosure or to make it possible to retire.

When the homeowner sells the home or dies, the home must be paid off and, if sold, the remainder of equity is given to its rightful heirs.

 Is any loan interest tax deductible?

These interests are deductible, some fully, some partially:

  • Education-related interest
  • Business interest
  • Investment interest
  • Mortgage interest

▼ Can you stop paying Private Mortgage Insurance (PMI)?

Usually people that make a down payment of less than 20% are required to pay private mortgage insurance by their lender. Once you reach 20% equity, PMI is cancelled, and any money accrued in your escrow account towards it will be credited to you.

Our Scarsdale tax preparers at Herman & Company CPA’s are here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Larchmont NY, Chappaqua NY, Dobbs Ferry NY, Mamaroneck NY, Purchase NY and beyond.

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Loan FAQ’s

Scarsdale tax preparer Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions! 

As tax professionals, our Westchester CPA firm sees firsthand many shared financial questions and concerns. In our “FAQ Series,” we will discuss these common topics and share our insight. Loan FAQs from Scarsdale Accountant

What are the possible implications if I co-sign for a loan?

The co-signer enters an agreement to be responsible for the repayment of the loan if the borrower defaults. A lender will usually not go after the co-signer until the borrower defaults, but they can lawfully go after the co-signer at any time.

It has been stated by finance companies that in the case of a default most co-signers actually pay off the loans that they have co-signed for including the legal and late fees that end up being tacked on. Clearly this can be a large financial burden, and it can also reflect negatively on the co-signer’s credit.

If you do agree to co-sign on a loan for someone, you can request that the financial institution agrees that it will refrain from collecting from you unless the primary borrower defaults. Also, make sure that your liability is limited to the unpaid principal and not any late or legal fees.

Upon co-signing you may have to brandish financial documents to the lender just as the primary borrower would have to.

Co-signing for a loan gives you the same legal responsibility for the repayment of the debt as the borrower. If there are late payments, this will affect your credit as well.

If you are asked to co-sign for someone, you may want to provide another option and suggest that they get a secured credit card. This way, they can build up their own credit history and not open themselves up to the possibility of taking on a debt too large, placing themselves, and you, in financial danger.

▼ How can I ensure that I get the best possible rates on my loans?

Be careful when signing up for a home equity loan or line of credit – the disclosed APR does not reflect the total fees that are associated with the loan, such as closing costs and others. Do not forget to compare this cost, as well as the APR, across multiple lenders.

The vast majority of home equity plans will utilize variable interest rates instead of fixed. A variable rate reflects the current prices of a publically available index, like the prime rate, or the U.S. Treasury Bill rate, and the rate of your loan will oscillate accordingly.

Generally a lender will offer a discounted introductory rate, often referred to as a “teaser rate.” Take caution – these rates can sometimes fluctuate unless it is stated that there is a fixed rate. Sometimes the lender will give you a great introductory rate that is variable and can change with time to a rate much higher than you originally agreed to.

Since the rate is linked to an index rate, find out which one it is and how much their margin is. Some companies will have a cap on how much your rate can vary within a particular period of time.

▼ Is it better to get a home equity line of credit or a traditional second mortgage?

With a second mortgage you will have a fixed amount of money that is repayable over a fixed period of time or is due in full at a given time. A home equity line of credit, on the other hand, is much more open-ended. You have a line of credit that can be borrowed from as you wish, and generally has a variable rate as opposed to a fixed rate.

Pay attention to the fact then when the APR is calculated it takes into account the interest rate charged plus points, finance charges and other fees, whereas with a home equity line the APR is calculated with solely the periodic interest rate.

▼ What will the loan cost?

Before you are charged any fees, the Truth in Lending Act requires that the lenders disclose to you all pertinent terms of the agreement: the APR, payment terms, other charges, and any information about variable interest.

Generally you will receive these disclosures at the same time that you receive an application form and any additional disclosures promptly after. If any of the terms change prior to the loan closing, the lender must return all fees that have been applied, should you choose to back out of the deal.

The finance charge is the total amount paid in exchange for the use of credit, which includes the interest rate, service charges and insurance premiums. The Annual Percentage Rate (APR) is the percentage paid on a yearly basis.

Scarsdale accountant Paul Herman is here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves White Plains NY, Scarsdale NY, Purchase NY, Mamaroneck NY, Larchmont NY, Katonah NY and beyond.

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Risks of Interest-Only Loans

Scarsdale tax preparer Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!

 

Not repaying principal, and therefore not building equity through debt retirement, means that an interest-only borrower is counting on market appreciation (price inflation) to help them own more of their home. Of course, this requires that prices increase while they hold the mortgage.

However, you don’t own the national realty market; you own a single home in a single neighborhood in a single town, and people will concede that prices can and do increase and decrease regularly on a localized basis. Scarsdale Accountant and Interest Only Loans RisksSo what does this mean to the interest-only borrower? There is a danger in not reducing the balance. If prices should fail to increase during the interest-only period, and if the borrower should find a need to sell the home, they could potentially be liable for thousands of dollars in sales costs which would need to be paid out of whatever equity (in the form of the down payment) they started out with.

The more extreme side of the first risk, of course, is that prices actually decline during the mortgage holding period. If our borrowers finds themselves in that situation, coupled with a low down-payment, they could easily find themselves “underwater” — a descriptive term that means they’ll sell the property for less than the remaining balance of the mortgage. In that unhappy case, the borrowers cannot sell without somehow coming up with what would likely be several thousand dollars to satisfy the mortgage balance as well as any sales charges (commissions, inspections, etc).

We noted before that payments made in the early years of a fully-amortizing are largely comprised of interest.

Interest Rate Risk

All the examples so far have been based on mortgages with a fixed interest rate. Unfortunately, most of the interest-only loans being made today feature only short fixed interest periods, if any; some featuring adjustable rates which can change each month. If history teaches us nothing else, it’s that low rates inevitably rise.
Above, we discussed term compression and its effect on payments, which causes them to rise above what they otherwise would be when the interest-only period ends. Now, magnify that compressed repayment term with a jump in interest rates, and you’ve got a recipe for a fiscal catastrophe.

Figure this: you, the interest-only borrower, have been happily making payments at $600 for the first five years of your (for now) fixed-rate loan. All the while, interest rates have been rising from their near-40 year lows to what could be considered “normal” — about 7% — and your monthly payment climbs over 40% to $848 per month. If you should find yourself in a period of considerably higher interest rates when the fixed-rate and interest-only period ends, your rate could climb to 9% or more — in which case your monthly payment could jump to $1,000 per month, or more.

Also at the moment, liberal and flexible mortgage underwriting standards are allowing borrowers to borrow more money for the same income, because qualifying ratios have been greatly expanded. Theoretically, a borrower’s budget might already be pretty stretched to the limit — and that’s before a nasty rate and payment hike.

Our Westchester CPA firm is here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Purchase NY, Mamaroneck NY, Bedford NY, Chappaqua NY and beyond.

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Using Reverse Mortgage as a Cash Resource

Reverse mortgage tip from a westchester cpa

Using a reverse mortgage on your home can provide you with the cash you need.

 

Westchester tax preparers at Herman & Company CPA’s have all the answers to your personal finance questions!

When an older homeowner has significant equity in his or her residence and needs funds, but lacks the resources to make monthly payments on a conventional mortgage, a reverse mortgage might provide a solution. A reverse mortgage is so-called because the mortgage balance normally increases over the term of the loan, rather than decreasing as the balance of a conventional mortgage does. A reverse mortgage allows a homeowner to receive loan proceeds over a certain period (by borrowing against equity in the home) while continuing to live in the house. (Other loan distribution options are available.)

An older homeowner may be motivated to obtain a reverse mortgage for many reasons. These include paying off an existing mortgage; purchasing a new residence; paying taxes, medical expenses, insurance, and household upkeep costs; covering financial emergencies; supplementing monthly income; paying nursing home expenses; and providing rainy day funds.

The amount a lender will advance depends primarily on the borrower’s age, equity in the home, and the interest rate. The older the homeowner, the larger the advances can be because there will probably be fewer advances than a younger homeowner would receive. Also, the more equity in the home, the larger the monthly advances can be. Finally, a lower interest rate can lead to larger advances.

In a typical case, the house will be sold at some point (normally after the borrower dies) to pay off the mortgage. Since the loan typically defers all repayment until the house is sold or the borrower dies, lending decisions may be based primarily on the home’s value rather than on the borrower’s creditworthiness and ability to make monthly payments as in the typical loan underwriting process.

In most cases, to qualify for a reverse mortgage, the homeowner must be at least 62 years old. He or she must also own the home outright or be able to pay off any balance with a portion of the reverse mortgage proceeds. To avoid default, the homeowner must maintain the home, pay property taxes, and provide insurance.

Caution: The expenses associated with reverse mortgages are high. Homeowners could pay as much as 7% to 8% of their home’s value in closing costs as well as a higher interest rate than with a regular mortgage or home equity loan.

For more tax tips and information, visit our website at http://www.hermancpa.com, or call us to speak directly with experts at our White Plains accounting firm, 914.400.0300.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.