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Education Center – Adults

Buying a Home
Mortgage Refinancing
Tax & the Homeowner
Investing & Taxes
“Mom-preneuers”

Buying a Home

Deciding to Buy or Rent
Buying a home is a rewarding experience. You derive a great deal of personal satisfaction from owning a home. Homeownership allows you to build up your personal net worth over time. Moreover, long-term increases in housing prices nationwide makes homeownership a relatively attractive investment.

In some cases, renting may be a more attractive option. For example, if you plan to move in a year or two, you are unlikely to recover the closing costs you pay when you buy a home. In addition, finding a home to buy generally takes more time than looking for an apartment to rent.
In addition to building up equity over time, owning a home offers significant tax breaks. The interest expense that you pay on up to $1 million in home mortgage debt ($500,000 if you are married and filing a separate return) is tax-deductible

Your tax savings from the mortgage interest rate are greatest in the early years of a mortgage loan. For example, on a 7%, 30-year fixed rate mortgage loan of $100,000, you pay $6,968 in interest the first year of the loan. If you are in the 25% income tax bracket, your tax savings are $1,742. In Year 16 of the loan, you pay $5,090 in interest, which saves you $1,273 in taxes. In Year 24 of the loan, you pay $2,926 in interest, which saves you $732 in taxes.
Renting may be a wiser course of action if you plan to relocate to another city soon or are in uncertain financial circumstances. For persons fresh out of school or newly divorced, renting may be the only realistic option.

Home Affordability
To determine how much of a home you can afford, you need to calculate your expected monthly payment.

MORTGAGE CALCULATORS
How much home can I afford?
Should I refinance my home?
Should I pay discount points?
Should I make extra payments on my mortgage?
How much of a down payment should I make on my new home?
Mortgage Payment Calculator
Comparing mortgages (i.e. 15, 20, 30 year)
What is the Loan to Value Ratio of my home?

Most of your payment will go toward loan principal and interest, also called P+I. However, your monthly payment is also likely to include amounts for property taxes and homeowners insurance. Because of these extra payments, your monthly P+I payment is sometimes called your P+I+T+I payment.

If you plan to make a down payment of less than 20% of the home purchase price, you will also have to add an additional amount for private mortgage insurance (PMI). Lenders require PMI to insure against the higher risk of default that occurs with loan-to-value ratios greater than 80%. (An LTV of 80% is equal to a down payment of 20%.)

Your housing ratio is your total monthly payment divided by your monthly gross income. Generally, the ratio should not be more than 28%. For example, if your monthly P+I+T+I payment is $1,400, your monthly gross income should be at least $5,000.

Your debt ratio is the sum of your P+I+T+I and any other credit card or loan payments, divided by monthly gross income. Debt ratio will obviously be a higher percentage, since most people have other loans or credit card debt. Generally, your debt ratio should not be more than 36%. In this example, with monthly gross income of $5,000, your total loan payments (including the proposed mortgage loan payment) should not be more than $1,800.

Types of Mortgage Loans
Fixed-rate loans. Because they offer a monthly payment that is known and does not change, fixed-rate mortgage loans remain the most popular type.

Most fixed-rate mortgages are for loan terms of 15 or 30-years. A 30-year loan has lower payments but a slightly higher interest rate. For all of 2007, the average mortgage rate on a 30-year fixed-rate loan was 6.34%, according to data from Freddie Mac. For 15-year mortgages, the average rate was 6.03%.

To pay off a fixed-rate loan sooner, check with your lender to make sure you can make prepayments anytime and for any amount, and at no penalty.

Adjustable-rate loans. After an initial term, the interest rate on an adjustable-rate mortgage loan is re-set periodically. This is to keep the rate in line with current market interest rates. For example, a 3/1 ARM loan offers a fixed rate for the first three years, adjusting once a year thereafter.

Convertible mortgage loans. These are ARM loans that allow you to convert to a fixed-rate loan at or before a specified time. The conversion privilege lets you start off with a low variable rate, then lock in when fixed rates drop low enough.

Balloon mortgage loans. These loans often have interest-only payments. In this case, you don’t amortize any loan principal and the entire loan amount is due at the end of the loan term. A balloon mortgage allows you to minimize your monthly payments until you refinance the loan. Another advantage is that a larger share of your payment may be eligible for the mortgage interest tax deduction.

Mortgage Refinancing

When you refinance your home, you seek to replace your current mortgage loan with a new loan that has more favorable loan terms. Usually, you refinance to pay off a higher-interest loan with a loan that has a lower interest rate.

When you refinance, you can choose to borrow just enough to pay off the mortgage balance you owe. If you have enough home equity built up, you may also be able to borrow an additional amount in what is called a “cash-out” refinancing. You can use this extra amount to pay off other debts such as an auto loan or credit cards. You should evaluate a cash-out refinancing carefully.

Closing costs. Your closing costs include points. The IRS also calls these mortgage points, discount points or origination fees. Lenders that specialize in refinancing typically charge 1 or more points, with 1 point equal to 1% of the loan amount. Points are usually the largest closing cost. You should also expect to pay for other expenses directly related to processing and approving your application. These costs may include fees for a credit report, title search, title insurance, appraisal and recording a new mortgage lien.

Application costs. Some lenders may charge an application fee to refinance. Paying a loan application fee is something only the most desperate of loan applicants should face. If you have a good credit history, you should be able to avoid paying a loan application fee.

A loss of tax-deductible mortgage interest. When you refinance with a lower rate, you usually reduce the amount of mortgage interest you pay. As a result, you lose some future tax savings that you would otherwise have with a higher-rate loan.

Tax & the Homeowner

When you buy a home, a major benefit is the tax savings you receive from the mortgage interest rate deduction. To take this deduction, you need to itemize your mortgage interest expense using Schedule A of IRS Form 1040.

If you own a second home, you can also deduct the mortgage interest expense you pay on it. The following types of mortgage interest are deductible in full in the year paid:

Interest on grandfathered debt. This is the interest on mortgages taken out before Oct. 14, 1987.

Interest on mortgages taken out since Oct. 14, 1987 to buy, build or improve your home. The IRS calls this home acquisition debt. In order to qualify for the full mortgage interest deduction, total mortgage debt from these first two categories cannot exceed $1 million, for married couples filing jointly. For married couples filing separately, the limit is $500,000.

Interest on mortgages for purposes other than to buy, build or improve your home. The IRS calls this home equity debt.

If you paid $600 or more in mortgage interest, your lender will send you Form 1098: “Mortgage Interest Statement,” or a similar form, by Jan. 31. The form will show the amount of deductible mortgage interest and points for the tax year. The amount should be entered on Line 10 of Schedule A. The amount of any mortgage interest not shown on Form 1098 should be entered on Line 11.

Investing & Taxes

Whether you invest in a mutual fund or buy a CD, your investment usually generates investment income
Mutual funds are professionally managed companies that invest in securities and pass on most of their income to investors who buy shares of the fund. The Securities and Exchange Commission regulates the mutual fund industry. In October 2007, mutual funds had combined assets of about $12.36 trillion.

In the case of stocks and mutual funds, income is earned as dividends. Dividends are a distribution of profits. In the case of bonds and savings deposits, income is earned as interest. Interest is an expense that the company is paying to you.

A bond fund invests in bonds that pay interest to the fund manager. The fund manager, in turn, distributes interest to you in the form of dividends.

Interest makes up a type of investment income that is taxed as ordinary income. Dividends make up a type of investment income that is taxed at the same rate as capital gains. Ordinary income includes wages, salaries and other income that is not considered as capital-gains income.

If you earn more than $1,500 in dividends and interest with a taxable account, the Internal Revenue Service requires you to complete Schedule B of IRS Form 1040. Each institution that pays you dividends or interest is required by law to mail you a Form 1099 by Jan. 31 to help you gather the information necessary to file your income tax return.

“Mom-preneuers”

Many mom-preneurs started their business so they can be home with their kids. But the greatest blessing of being a mompreneur may also be its greatest challenge: Try putting out a professional image when your baby is crying in the background or your presentation is covered in crayon. Let’s face it: It’s tough to get any work done with baby in tow.

A home office can be a real office, but as your business grows, you’ll probably need to move on and out of your home office.

Pros and Cons
The advantages of moving out of your home office boil down to increased professionalism, more space to work and unlimited growth potential. Of course, with any advantage come a few disadvantages, but nothing that can’t be overcome:

Your daily commute will be longer (and not on foot), but if your office is located near your home, the lost time and frustration should be minimal. You’ll need to furnish your office professionally. The dining room chair doubling as an office chair will have to go-especially since clients will be visiting your office. Your overhead will increase, but your revenues could grow proportionately as you attract larger or more clients.

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