Resolutions for Homeowners - Part I : Rooftop Views

Rooftop Views

Resolutions for Homeowners - Part I

Here is the first two of 10 resolutions that the American Homeowners Foundation urges all Homeowners to adopt this year.

One of the best New Years Resolutions homeowners can make is to eliminate expenses that are unnecessary and have no benefit. This is a tall order for many of us, with implications ranging from how you finance your mortgage to the energy efficiency of your home. Nevertheless it’s a very worthwhile exercise which will affect your current and future lifestyle. Many have already made some of the following ten 2008 New Years Resolutions for American Homeowners, but few probably addressed them all.

Resolution #1: I will get my home finances in order.

Despite all the disaster stories about the mortgage meltdown, mortgage interest rates are relatively low and widely available to creditworthy homeowners. This is therefore a good time to review how you are financing your home. You may be able to save money, reduce financial risks, improve your financial status and/or use the opportunity to incorporate home financing in your long term financial planning. This is especially true if you currently have a subprime and/or adjustable rate mortgage.

If you have an older mortgage, there’s a pretty good chance you can get a lower interest rate - and therefore lower monthly payments - if you refinance your mortgage today. Since most of your mortgage payments in the early years consist of interest, you will also end up with a larger mortgage interest tax deduction with a new mortgage. If you don’t take any cash out and your new rate is lower, your actual monthly payments will also be lower. Paying less money while getting a bigger tax deduction is a good proposition. Also, the cost of private mortgage insurance (PMI) is also tax deductible for mortgages originated after 2007.

If you have an adjustable rate or interest only mortgage that has not yet reset, you have done well in this period of low mortgage interest rates. But don’t assume that your good luck will continue. The increase in monthly payments could be frightening when mortgage rates increase in the future. Worse, the large number of adjustable rate loans is expected to trigger as many as one million foreclosures when their teaser rate runs out in 2008. This may be the best time to refinance to a safer fixed rate mortgage if your current income will qualify you for the monthly payments.

If you have substantial home equity when you refinance your mortgage you can take cash out for worthy uses such as remodeling. Since the remodeling is financed through a mortgage, the interest on the cash you took out for the remodeling project is tax deductible. This is a big plus compared to using your credit card to pay for remodeling costs, because credit card interest isn’t tax deductible. If you currently have substantial high interest credit card debt and/or a higher interest short term second trust on your home, it may make sense to use the proceeds to retire those as well. However, there are limits on the mortgage interest deductibility if you finance for more than the original cost of the home plus improvements. Check with IRS (www.IRS.gov or 800-829-1040) or your tax advisor for the limitations before you take cash out.

Resolution #2: I will stop lending the government money interest free.

More than 101.2 million taxpayers got more than $229 billion in income-tax refunds in 2006. The average refund was $2,264. Refunds from IRS may sound like good news, but the IRS didn’t pay those taxpayers any interest on that refund, which accumulates through the year. Taxpayers who received refunds would have been better off if they reduced the amount withheld from their income tax every paycheck by enough to break even with IRS at years end, and put the extra amount in their paychecks into investments that earn interest or dividends. If they are also paying interest on credit cards (which isn’t tax deductible), it would probably make even more sense to use the difference to reduce their credit card balances.

Some taxpayers save their income tax refunds, but others blow it on things they could live without. The latter is a big mistake, especially with the growing number of economists who see a growing likelihood of a recession in 2008. It may be wise to hold off until next year on a purchase of a new car, boat or other major expense that can be deferred another year.