Interest-only loans: create perfect storm?
Question: Joyce, what are the benefits of interest-only loans?Answer: Many of the approximately 7,500 mortgage lenders in the United States offer interest-only loans, a product that enables homebuyers to only pay the interest on their loan for the first two to five years, allowing many to purchase property worth more than they could otherwise afford. The “interest-only” option can slash $770 a month from the typical payment of $2,000 on a $350,000 mortgage. However, there is increasing fear among mortgage lenders that a new wave of defaults and even foreclosures are on the horizon as many buyers have not heeded early warnings that these mortgage products can become problematic once larger payments are due.George Yacik of SMR Research Corp. states, “We suspect that all the elements are in place for a perfect storm – a major delinquency and default spike starting by the end of 2005.” Question: I need clarification about the $500,000 tax exemption for the sale of my principal residence. If I were to sell my house, would I get only the $250,000 exemption because my wife isn’t on the title even though I am legally married? Answer: According to an article by Robert Bruss for Inman News, to qualify for the $500,000 principal residence sale exemption of Internal Revenue Code 121, both you and your wife must (1) occupy your principal residence at least 24 of the 60 months before its sale, and (2) file a joint income tax return in the year of the home sale.If you meet the occupancy time test, but your wife doesn’t, then you get only a $250,000 exemption. However, if she meets the occupancy time test, but you don’t, no exemption is allowed because you are the titleholder who must qualify.The home’s title need only be held in one spouse’s name to qualify for up to $500,000 principal residence sale tax-free profits if both spouses meet the occupancy time test. Question: We are interested in doing a “cash out” refinance on our home. Are there any risks involved with this?Answer: Cash-outs involve refinancing an existing mortgage and trading in home equity for cash. This option is especially popular when interest rates are down, because it allows homeowners to refinance at lower rates while gaining access to extra cash. Even better, their monthly mortgage payment usually remains the same or even goes down.The benefits of cashing out include stretching the term of the loan to access more money at a lower rate, the ability to replace high-cost debt, and avoiding the need to cash in taxable investments.Cashing out does involve some risks – including possibly renewing a mortgage for its full life and incurring a higher total interest cost for financing and reducing home equity. It can be detrimental if housing prices decline; homeowners who have little equity in a declining market could find that they owe more on their property than what it is worth. Also, homeowners must manage their finances carefully, using the cash-out funds to handle expenses and then keeping spending under control. Qualifying for a cash-out is also difficult. Because this type of borrowing eats into equity, it raises the risks to lenders, who, in turn, will want to carefully scrutinize applicants.An alternative to cash-outs is the home equity line of credit, which allows a consumer to borrow on a revolving basis. Homeowners need only pay interest on the amount borrowed and will not have to reapply and pay service charges to gain access to more money. This option is most appropriate for borrowers whose cash-out will not reduce their mortgage payment and also for homeowners who want an extra source of cash for ongoing projects, rather than for a specific purpose.Call JOYCENENNINGER at (970) 468-6800 or (800) 262-8442 for answers to your real estate questions. Or e-mail Joyce@SummitRealEstate.com or you can visit her website at http://www.SummitRealEstate.com. She has lived in Summit County for more than 20 years. Joyce is the broker/ owner of Summit Real Estate – The Nenninger Team at the Dillon Ridge Marketplace. Her longtime residency and years of real estate experience can help you make the most of any buying or selling situation. She is a Certified Residential Specialist (CRS), the highest designation awarded to a Realtor in the residential sales field. She ranks in the top 4 percent of Realtors nationally.
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