Negotiating and Closing A Good Deal

Can a homeowner deduct losses from a natural disaster?

The IRS allows no deduction for losses on the sale of your own home. There's no way to use a loss to your advantage on your income tax return. It won't matter what type of misfortune you may have run into, write Edith Lank and Miriam S. Geisman in Your Home as a Tax Shelter, Dearborn Financial Publishing, Chicago.

If the house were rental property, on the other hand, your loss would be deductible, they say.

However, casualty losses from fires, floods, earthquakes and other disasters are deductible from both state and federal income taxes.

A casualty is the damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected or unusual, Lank and Geisman write. Causes range from earthquakes, tornadoes, floods and storms to vandalism and fires.

In contrast to fire insurance, which often covers extensive replacement costs, Lank goes on to write, IRS deductions for casualty losses never can exceed fair market value before the casualty. Your loss of personal property is figured separately.

How does FHA work?

The U.S. Department of Housing and Urban Development offers a variety of loan insurance programs through the Federal Housing Administration that require approximately 3 to 5 percent cash down. FHA loan limits vary depending on the county where the property is located. The maximum FHA loan limit has been increased to $151,725, but that applies primarily to high-cost areas. The loan limit may be lower in other regions.

FHA loans administered by HUD are originated by private lenders. For more information, contact lenders who offer FHA loans or a regional HUD office.

What home buying costs are deductible?

Points paid by the buyer are deductible for that year, say Edith Lank and Miriam S. Geisman, authors of Your Home as a Tax Shelter, Dearborn Financial Publishing, Chicago. The IRS also has ruled that even points paid by the seller are deductible.

According to Lank and Geisman, not a lot of other fees are immediately tax-deductible, but some may be figured into the adjusted cost basis of your home, an important figure when people ultimately calculate capital gains.

When you buy your home, you have closing expenses, many listed on your settlement statement, that are not deductible on your income tax return, but, instead, simply are added to your cost basis for the property, Lank and Geisman write.

If you haven't yet purchased your home, a look at the following list could frighten you away from the project forever! Any of these expenses you may encounter cannot be used as income tax deductions; add them to your basis: title insurance, loan-application fee, credit report, appraisal fee, service fee, settlement or closing fees, bank attorney's fee, attorney's fee, document preparation fee and recording fees, the authors say.

How do you lock in an interest rate?

Some experts advise borrowers to obtain a mortgage lock-in during times of rising interest rates. After spending time shopping for the most favorable rate, a lock-in is one way to ensure that same rate still will be available when you need it.

Lock-ins make sense when borrowers expect rates to rise during the next 30 to 60 days, which is the usual length of time lock-ins are available.

A lock-in given at the time of application is useful because it may take the lender several weeks or longer to prepare a loan application, states "A Consumer's Guide to Mortgage Lock-Ins," published by the Federal Reserve Board and Office of Thrift Supervision in Washington, D.C.

However, lock-ins come with a price. Some lenders require borrowers to pay lock-in fees to assure particular rates and terms.

Lock-in forms that are not absolute -- they allow the lender to change rates and terms for any reason -- are a sham, says Peter G. Miller, author of "Buy Your First Home Now," Harper & Row, New York; 1990. "If you pay a lock-in fee, be certain that both rates and points are guaranteed. "Also, be sure the lock-in period is long enough, at least 60 days from application. If the lock-in period is shorter and closing is delayed, then the lock-in can expire and the lock-in fee will be lost," Miller writes.

If your lock-in expires, most lenders will offer the loan based on the prevailing interest rate and points, according to the consumer's guide.

Lenders may have preprinted forms that set out the exact terms of the lock-in agreement. Others may only make an oral lock-in promise on the telephone or at the time of application, the guide states.

How do you get a low-interest rate loan?

Price discounts and interest rate buydowns are common incentives offered by new-home builders trying to overcome slow sales.

Buydowns are a financing technique used to reduce the monthly payment for the borrower during the initial years of the loan. Under some buydown plans, a residential developer, builder or the seller will make subsidy payments (in the form of points) to the lender that "buy down" or lower, the effective interest rate paid by the home buyer, thus reducing monthly payments for a set period of time, according to John W. Reilly, author of "The Ultimate Language of Real Estate," 4th Ed., Dearborn Financial Publishing, Chicago.

State agencies often offer lower rate loans. But to qualify, borrowers usually must be a first-time home buyer and meet income limits based on the median income level of their county. This is targeted to people in any income level.

How do you find government repossessed homes?

The U.S. Department of Housing and Urban Development acquires properties from lenders who foreclose on mortgages insured by HUD. These properties are available for sale to both homeowner occupants and investors. HUD-owned properties can be purchased only through a licensed real estate broker. Local brokers will have information of interest to prospective purchasers, such as the location of schools and churches and the availability of public transportation and shopping. Contact the real estate broker of your choice to see one or more of HUD's advertised homes.

HUD will pay the broker's commission up to 6 percent of the sales price.

Down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range from the conventional market's 5 to 20 percent. When the FHA provides insurance, HUD sources say a condo can be purchased for as little as $100 down.

Buyers should be aware that HUD homes are sold "as is," meaning limited repairs were made but no structural or mechanical warranties implied.

What about a 40-year mortgage?

Smaller monthly payments are the primary advantage of adding 10 years to the traditional 30-year mortgage, but real estate experts say the shorter-term loan usually is more beneficial for the home buyer. "Whenever money is tight some bright person comes up with this thought: Monthly mortgage payments will be lower if loan terms are stretched from 30 to 40 years. If monthly payments are lower, more people can qualify for financing. Therefore, why not have more 40-year loans?" asks Peter G. Miller in "The Common Sense Mortgage, How to Cut the Cost of Home Ownership by $100,000 or More," Harper Collins Publishers, New York.

The drawback becomes apparent simply by calculating the cost of additional interest payments. For example, Miller says a borrower who obtains an $85,000 loan at 9 percent on a 30-year note will have monthly payments of $683.93; the same 40-year loan has installments of $655.66. To save an insignificant $28.27 a month, the borrower will end up paying out an extra $58,323.77 over the life of the loan.

How do building codes work?

"Building codes are designed to provide minimum standards to safeguard the health, safety and welfare of the public by regulating and controlling the design, construction, quality, use and occupancy, location and maintenance of all buildings and structures," according to John W. Reilly, author of "The Ultimate Language of Real Estate," 4th Ed., Dearborn Financial Publishing, Chicago. "Some codes (plumbing codes, electrical codes and fire codes) are divided into specialized areas. Codes are enforced by the issuing of building permits and certificates of occupancy and by inspections, with fines being imposed on violators ... "

"Any owner contemplating an addition and/or change to his or her property should first check with the appropriate county or municipal building department to avoid any building code violations, which will generally render a seller's title unmarketable," Reilly writes. In addition, he says a seller's failure to disclose such violations (they have knowledge of) may constitute a material misrepresentation, entitling the buyer to rescind the transaction and obtain the return of his or her money.

How do you choose between fixed and adjustable rates?

There is risk involved in selecting an adjustable rate mortgage, or ARMs, because rates may go up. On the other hand, a fixed-rate loan offers good protection against rising interest rates but the borrower is stuck with the initial rate if interest rates drop.

Statistics show that home buyers who have chosen ARMs since 1981 have saved thousands of dollars. For a period, the percentage of home buyers applying for ARMs rose substantially, then buyers and homeowners began flocking to fixed-rate loans.

Whether to opt for a fixed or adjustable rate mortgage is a matter of personal choice. The first route offers stable payments; the second offers lower initial payments.

Another consideration is the length of time a buyer plans to own the home. If you're planning on moving within three or four years, an ARM makes sense even if rates do nothing but rise during that period of time.

Figure on the worst . Figure out what it will cost in three or four years with an ARM. Is that O.K.?

People can also sit down with their lender and make some calculations before deciding.

How is the price set?

It's critical to price your home right in relationship to the current real estate market and to the conditions prevailing in your local marketplace. Because the real estate market is continually changing, and market fluctuations have an effect on property values, it's imperative to select your list price based on the most recent comparable sales in your neighborhood.

A comparative market analysis provides the background data on which to base your list-price decision. Study the comparable sales material presented to you by the different agents you interviewed initially. If the analyses are more than two or three months old, have your agent update the report for you. If all agents agreed on a price range for your home, go with the consensus.

Watch for an agent whose opinion of value is considerably higher than the others.

What is the best time to sell your house?

In addition to supply and demand, and other economic factors, the time of year you choose to sell can make a difference both in the amount of time it takes to sell your home and in the ultimate selling price. Weather conditions are less of a consideration in some states than in other parts of the country. But generally the real estate market picks up as early as February, with the strongest selling season usually lasting through May and June.

With the onset of summer, the market slows. July is often the slowest month for real estate sales due to a strong spring market putting possible upward pressure on interest rates. Also, many prospective home buyers and their agents take vacations during mid-summer.

Following the summer slowdown, real estate sales activity tends to pick up for a second, although less vigorous, season which usually lasts into November when the market slows again as buyers and sellers turn their attention to the holidays.

Sellers often wonder whether or not they should take their homes off the market for the holidays. Generally speaking, you'll have the best results if your house is available to show to prospective buyers continuously until it sells.

Are there no-cost loans?

No. While many lenders are offering purported "no cost" loans, banking regulators have cracked down on some of these misrepresentations. Advertised "no-cost" loans may actually cost the borrower more over the long term because these costs are often rolled into the new note through higher interest or more principal.

A typical no-cost loan is one where the points charged and all fees are included in the loan principal, meaning that the borrower does not pay these expenses at the close of escrow, but instead ends up paying on them over the life of the loan. The loan is called a no-cost loan because the borrower is not charged any fees up front.

Experts recommend that consumers closely examine so-called "no-cost" loan programs. Even with truth in advertising laws the old saying "caveat emptor" (Let the buyer beware) still applies.

Where are interest rates headed?

No one knows for sure where rates are headed. Most analysts now are rethinking their forecasts because none of them predicted that rates could move up as high and as fast as they did in the fall of 1981, when mortgage interest rates topped 18.6 percent. But they fell back to 10 percent and remained there throughout most of the 1980s.

Beyond public policies put in place by the Federal Reserve Board, there are no laws that govern mortgage rates.

Historically, usury laws were used to prevent lenders from charging sky-high interest rates when lending money.

But in some states where there are usury laws, banks, thrifts and a number of other financial institutions are exempt from the law.

Today, interest rates are governed solely by the financial markets and by Federal Reserve Board action, neither of which can be predicted with absolute certainty.

How are the rates set for seller financing?

The interest rate on an owner-carry loan is negotiable. Ask your agent to check with a mortgage broker to determine the current rate on institutional first (or second) loans. Seller financing is usually a little less expensive than conventional financing because loan fees (points) typically aren't charged. The interest rate on a seller-carry loan will also be influenced by current treasury bill and certificate of deposit rates. Sellers usually aren't willing to carry a loan for a lower return than they'd earn if their money was invested elsewhere.

Are one-bedroom condos a good investment?

Historically, one-bedroom condominiums were not considered as good an investment as condos with two bedrooms or more. But because of high housing costs, this has proven not to be true in some markets. And changing demographic trends also have increased demand for one-bedroom condos. There are more single home buyers in the market today than any time in history.

Are interest rates negotiable?

Some lenders are willing to negotiate on both the loan rate and the number of points but this isn't typical among many of the established lenders who set their rates like large corporations set the prices on their goods. Nevertheless, real estate experts say shop around, know the market and try to get the best deal. You should always look at the combination of interest rate and points and get the best deal possible.

The interest rate is much more open to negotiation on purchases that involve seller financing. Generally, these are based on market rates but some flexibility exists when negotiating such a deal. Compare the mortgage charts that are published in most newspapers' business or real estate sections.

Can you deduct the cost of home improvements?

Mortgage interest payments on acquiring and improving principal residences and second or vacation homes are fully deductible from income for tax purposes so long as the debt does not exceed $1 million,'' says John Reilly, author of The Ultimate Language of Real Estate,'' 4th Ed., Dearborn Financial Publishing, Chicago. In addition, expenditures for permanent improvements can be added into your home's cost basis, or amount of money invested in a home, which reduces capital gains when it comes time to sell.

Home owners should save all receipts so they can include money spent over the years for permanent improvements, repairs after a fire, flood or storm and special property tax assessments for neighborhood improvements.

Capital gains are determined by the difference in price from the time a home is purchased and the time it is sold, minus the cost of any permanent improvements.