Archives for June 2007

Down Payments…Why less may be more

It pays to have a plan when you’re determining how much down payment you should use when you’re buying a home.   Often times, when families have sold a home and they have benefited from our local appreciation, they may have a significant amount of funds available (proceeds).   A typical reaction is to invest all of the funds from the house they’ve sold into their new home.   What’s wrong with this?  Nothing really…except if you want or need the cash back out, there’s now a cost and process to extract it (refinance or equity loan).

And consider this…your home equity does not earn any interestZero.  Instead, you could invest the funds that have gone towards your home equity into an interest bearing vehicle advised to you from your qualified financial planner.   

The more money you use for down payment, the more you’re reducing your tax deduction benefit of the acquisition mortgage as you are reducing your mortgage amount.  Your tax deduction on your mortgage is based on when you purchased your home, and obtained your "acquisition mortgage" to finance the purchase.   As you pay the mortgage down, this amount is reduced.   When you refinance, the balance just prior to the refinance is treated as the "acquisition debt" that is allowed to be deduct the interest from.   You are also currently allowed an additional $100,000 in home equity mortgage interest deductions.   You may want to consider having a larger mortgage balance when you purchase to establish a larger tax benefit.

Example, when you purchased your home 10 years ago, your mortgage was $180,000.   You’ve been making on time payments and the balance is now $150,000.  You refinance and have a new mortgage balance of $300,000.   The amount of interest you can deduct is based on a mortgage amount of $250,000 ($150,000 plus the $100,000 home equity allowance).  There may be other compensating factors and I am not a CPA, tax or financial planner.  Always consult with your trusted financial advisers.

Do you have debts (with no tax deduction benefit) that can be eliminated with proceeds?   Often times, the monthly money you free from eliminating a debt (such as credit or car payments) that once went to a payment is more than what the increase in the mortgage payment would be from trading the debt to a mortgage.

Example, if you have a car loan with a balance of $11,000 and a payment of $350, increasing your mortgage amount by $11,000 would provide an increase in your payment $67.73 per month (based on a 30 year fixed payment with a rate of 6.25%).   This frees up $282.27 a month, plus the interest on the mortgage is tax deductible, the auto loan is not.

Is your retirement or the kid’s college tuition funded?   How about the vacation home or investment property you’ve been contemplating?   Will you need some extra dough to make improvements to your new home?

My only point is for you to consider a strategy for your down payment before you automatically roll 100% of it over to your next home.   Plan up front so you don’t need me for a refinance too soon in the future…wait!!  I take it back. 

Larry Cragun’s May Magnificent 7 Nominees

383169803_80606fe014_oI feel pretty special when Larry Cragun of RealEstateUndressed presents his monthly nominees for his Magnificent 7…especially when my post are included with some pretty good company.   He focuses on consumer friendly content, just like I try do.

Larry has selected 8 posts from May that are worthy of reading…somehow, three of articles are written by me.  Do check out everyone else’s worthy reads and give Lar a visit.

Home Equity Loans

Today I received an email from one of my clients regarding home equity loans, also known as a HELOC.  Here’s part of their question:

"We keep getting info regarding a home equity loan. We want to know what a home equity loan is and if that is something for us?"

Home equity loans can be an excellent financial tool when used properly.   They can also be dangerous if not managed correctly.   Typically, home equity loans feature interest only payment which are on the balance used on the loan.   The rate is based on current prime and has a lifetime cap of 18%.  A home equity loan will adjust whenever the prime rate adjust (unless the rate has been fixed).  They operate very similar to a credit card. 

The rate may vary based on loan to value (equity), credit score, the level of documentation (full doc or low doc) and occupancy (owner vs. rental).    The rate is prime plus or minus what ever factor is determined based on the above criteria (margin).  For example, it could be prime plus 0, or prime plus 1, prime minus 1, etc.   Prime is currently 8.25%.   There is a draw period and when that time is up (typically 10 or 15 years) the balance at that time is due in full.

Situations where home equity loans are best used are when you’re not using them.  For example, if you have a home equity loan attached to your home and you do not intend on using it.   It’s there in case of an emergency, such as loss of employment or medical need.   They are also great if you’re anticipating having cash to pay it down (and you’re not planning on investing the cash or using it elsewhere) since your mortgage payment is based on the balance.  We used a home equity loan for the purchase of our current home.  We are paying it off in chunks and intend to keep it open even once it is paid.   Home equity loans creates liquidity and provides flexibility with you equity and cash flow.  I prefer the home equity loans where  you have the option of fixing your rate (however, if you’re in a market where the rates are going down, you may not want to fix it).

When home owners use home equity loans like a maxed out credit card and tap out significant amounts of their equity and it’s a pattern to pay off debt; a  home equity loan can be a recipe for trouble.   A home equity loan, with the wrong plan or with borrowers who cannot resist relying on it, can quickly gobble up your equity.

Fixed rate second mortgages are other possible mortgage options to the home equity loan.  The advantage to the fixed rate is that…the rate is fixed.  And, you know what your payment will be month to month.   However, if you are planning on making a lump mortgage payment, unless the lender is willing to re-amortize the mortgage, you’re stuck with your existing mortgage payment.

A refinance of your first mortgage may also be worth considering depending how long you plan on retaining the mortgage and what your blended rate would be with having two mortgages.

When the prime rate was lower, HELOCs were very popular.  And, once prime began to climb, many borrowers refinanced out after realizing what their rates were climbing too and how quickly it can happen.

With so many options available, this is why it’s important to work with a professional Mortgage Planner who will consider your options and financial goals.

Questions from a client…”great” offers in the mail and home equity loans.


I just received two excellent questions from one of my clients who I helped with their financing when they bought their first home and their move up home which they currently live in.   

"We keep getting info in the mail from some odd place that says that we have a mortgage through Mortgage Masters and that they can reduce our house payment to $900.00 per month. We shred them every time we get them but now I am curious if it is true? It does not have the Mortgage Masters logo on it, it just says that they know we have a mortgage balance of $266,000.

Also, we keep getting info regarding a home equity loan. We want to know what a home equity loan is and if that is something for us? I know this will probably be too much to respond to in an email but maybe you have something to send us about what all of this is and what (if anything) you think we could do to lower our house payment? Probably not since we have such a low rate but we thought we would ask!"

Both of these questions are excellent and deserving of their own post.   Please keep your questions coming.   The home equity post will follow soon…I recently posted an article at Rain City Guide regarding offers from too good to be true mortgage offers.

Live at the picnic

Update:  I did this post from my new Treo…photo and all.   My kids say that it’s especially sick that I blogged during a picnic for bloggers! 

It was so much fun to meet the people behind the blogsI can’t even remember them all and I’m not sure that I want to try naming them in fear of who I might leave out! 


With three (pretty patient) teens…we had to leave after a couple hours…I believe the picnicking is still going strong.

Happy First Birthday, Active Rain!

PS:  Lydia, your guac rocks!

Here are more photos of the Active Rain event courtesy of Betsy Talbot.

Active Rain BBQ at Magnolia Park (correction)

I’m reposting this correction mainly because Citizen Rain shows titles and a few leading sentences of Seattle area blogs.  I had bad info on the post I did late last night.    I see my previous title is not reflecting the correction and I certainly don’t want to send RE bloggers to the wrong park!

This should be pretty fun.  So far, Active Rain is showing 31 attendees and the weather is perfect!

Active Rain’s Birthday Party in Magnolia Park

Mpj042861800001How could I have missed this?  Perhaps it’s because last weekend my Dad was admitted to the hospital and it’s been touch and go.  Somehow they managed to release him tonight (much to my surprise). 

Anyhow, Active Rain–a real estate blogging network national biggy based out of Seattle, is having a picnic for Seattle real estate bloggers tomorrow at Magnolia Park to celebrate their first birthday.   Rain City Guide Creator, Dustin Luther…just blogged the details about it.

Happy 1st Birthday Active Rain!

Note:  Late last night I posted the picnic was at Magnuson Park…this is not correct.  The picnic is at Magnolia Park.   Ooops!