What is Mortgage Insurance?

There are several types of mortgage insurance, but the type that everybody complains about is private mortgage insurance. That's because homeowners with private mortgage insurance have to pay a hefty premium for an insurance policy, and it doesn't even cover them. Private mortgage insurance offers zero protection for the borrower.

Borrowers might think that private mortgage insurance makes them special, but there are no private services offered with this type of mortgage insurance.

Why Do You Pay for Private Mortgage Insurance?A lesser known type of mortgage insurance is the type that pays off your mortgage in case you die. You pay a small premium for a small chance of dying. You probably could get better protection through a life insurance policy. The type of mortgage insurance most people carry is the type that insures the lender in the event the borrower stops paying the mortgage. That's right, private mortgage insurance insures your lender.

Many borrowers take out private mortgageinsurance (PMI)because their lender requires it. The lender requires it because the borrower is putting down less than 20% of the sales price as a down payment. The less a borrower puts down, the higher the risk to the lender. So, the lender wants insurance against a default.

You don't choose the mortgage insurance company and you can't negotiate the premiums. It sounds almost unAmerican, doesn't it? But that's the way it works when you get a mortgage that exceeds 80% loan-to-value.

FHA charges for mortgage insurance as well. Not only do you pay an upfront premium for mortgage insurance, but you pay a monthly premium, along with your principal, interest, insurance for property coverage and taxes.If you put down 5%, for example, on a $200,000 home and stopped making yourmortgage payments, mortgage insurance would pay your lender $30,000, which is the 15% that you did not put down to protect the lender to an 80% LTV. This would happen after foreclosure.

How Do You Cancel Private Mortgage Insurance?

Once your equity rises above 20%, either through paying down your mortgage or appreciation, you might be eligible to stop paying PMI. The first step is to call your lender and ask how you can cancel your private mortgage insurance.

The lender will want proof that your equity position is secure and exceeds 20%. It will get that proof by requiring you to pay for an independent appraisal. You don't get a voice in choosing the appraiser or the amount that the appraisal will cost you, but it will probably cost between $350 and $500.

FHA rules are different. If you have an FHA loan, you will need to pay down your mortgage to 78% of your original sales price. Even if appreciation has pushed your equity up, it won't matter. You will need to reduce your original principal balance.

How Can You Avoid Paying for Private Mortgage Insurance?

There are many ways to avoid paying for private mortgage insurance. You may not necessarily qualify for these nor want to do any of them.

• If you are a veteran, you can take out a VA loan, which has no private mortgage insurance.
• You can put down 20% or more as a down payment. Maybe you could tap the Bank of Mom and Dad?
• You can pay a higher interest rate. Sometimes the difference in your monthly payment spread out over your planned term of occupancy is much less than paying for mortgage insurance.
• You can take out a combination loan of 80 / 10 / 10. This consists of a 10% down payment, an 80% first mortgage and a 10% second mortgage.
• Look into a HomePath mortgage offered by Fannie Mae on select Fannie Mae bank-owned homes.
• Find out if your bank makes special loans to teachers or doctors as sometimes these types of financing do not demand private mortgage insurance. Of course, you will have to be a teacher or medical professional to qualify for these types of loans.

Realize that there is never a guarantee that your loan will not contain MI if your equity is less than 20% because lenders can pay for MI without your consent or knowledge.

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Sell Your Rental Property For A Profit

Unlike selling a stock, investment properties can't be unloaded in a few seconds with a click of your mouse. The time between the decision to sell and the actual date of sale is often measured in weeks or months. Selling your own home can be an intimidating process if you don't know where to start, but selling an investment property requires even more work.

The amount of capital and the taxation issues surrounding the realization of that capital are complex when dealing with investment real estate. It is not, however, impossible to accomplish on your own. In this article we'll look at the process of selling an investment property and focus on how to limit taxes on the gains.

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Why Sell?The reasons for selling a rental property vary. Landlords who personally manage their properties may move and want to buy a different investment property near their new residence. Or, a landlord may want to cash in on the appreciation of a rental property rather than accumulating money through rent. It may even be a case of a property that is losing money, either through vacancy or not enough rent to cover the expenses. Regardless of the reason, real estate investors looking to sell will have to deal with taxes. 

The Tax Man ComethThe capital gains taxes on a rental property sale are much steeper compared to the straightforward sale of a personal use property. The basic capital gains that you have to pay on the profit from the sale are increased by any depreciation you claimed against the property. This means that if the property lost money and you used the loss against your tax bill in previous years, you will have a larger tax bill when the sale goes through. (To read more about capital gains and taxes on your rental property, see Smart Real Estate Transactions and Tips For The Prospective Landlord.)

Example - Capital Gains Tax and Depreciation Let\'s say you have a rental property that you bought for $150,000 and it sells for $200,000. Usually, this means that you pay capital gains on $50,000. If you deducted $20,000 in depreciation over the time that you owned the property, however, you owe the difference between the sale price and your purchase price minus depreciation: $200,000 - ($150,000 - $20,000). Instead of owing capital gains on $50,000, you now owe capital gains on $70,000. Note: This shouldn\'t discourage you from claiming depreciation losses. It is almost always better to realize tax breaks sooner rather than later.

Rolling OverThe Internal Revenue Code Section 1031 allows real estate investors to avoid taxes on their gains by re-investing them in a like-kind property. With the help of a lawyer or a tax advisor, you can set up the sale so that the proceeds are put into an escrow account until you are ready to use them to buy a new property. There is a time limit of 45 days to choose the new property and six months to complete the transaction. If you intend to do a rollover, you should start looking for the new property before you sell the old one.

The 1031 exchange works great if you intend to re-invest in another property. If you merely want to stop being directly involved with property, you can either hire a professional manager for your current property, or sell it and buy a professionally managed property. If your goal is purely to raise capital, however, you will just have to eat the capital gains tax.

Incorporating as a ShieldIncorporating is becoming increasingly popular for real estate investors. By incorporating, investors can lessen their personal liability making the corporation act as a shield between you and the potential that a tenant may sue you. Your house and personal finances cannot be claimed in any kind of court settlement when you incorporate. Corporations also have different tax rules that are quite favorable, especially with the capital gains from selling a property.

For a certain type of real estate investor, incorporation makes sense. If you are employing people to find and manage a wide range of income-producing properties and making significant profits at it, incorporation will lessen your tax bill and then you will see the profits through the share structure of your corporation. For most real estate investors, there are better ways to get the benefits of incorporation without complicating how income is realized.

Incorporation can create a barrier between you and the earnings from your property so that if you depend on that income in any way, you may not be able to access it as easily as you'd like - particularly with large profits such as those from selling a property. It is comparatively easy to incorporate, requiring only some professional advice and paperwork, but getting your properties out of a corporation (for example, to sell them off and retire) is more complex because you are walking the line of intentional tax evasion/fraud unless you sell the corporation instead of the properties that make it up. This is, of course, much harder than selling a house.

In contrast, if you are personally managing two or three properties and have even one or two more that are professionally managed, you may not benefit from incorporation. If the income from your rentals isn't outpacing your expenses for each property by a large margin, you are better to hold them as is and use depreciations and write-downs where you can, or change your real estate holdings into a small business.

In addition to using a small business as an alternative to incorporation, some states allow real estate investors to open a separate limited liability company for each property they own. While this doesn't necessarily lessen the taxes, it does protect your own finances, as well as each individual property, from any litigation that may be carried against one of your properties.

ConclusionSelling a rental property can be challenging, and it is even harder if you are hoping to avoid a large tax bill on the proceeds. If you are selling in order to invest in a different property, then you can simply do a 1031 rollover and put off the tax bill. If you are selling because you need the capital, you will have to pay some taxes. The best-case scenario, as with stocks, is to put off selling an investment property, especially a rental that is breaking even or better, unless you offsetting credits or losses to take some of the bite out of the capital gains. This way, you will have a chance of reducing your overall tax bill and pocketing more of the cash.

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Keep Your Pending Home Sale From Collapsing

Last year ended with a slight increase in the number of homes under contract, according to new figures out this week. Recently, the National Association of Realtors (NAR) released its latest Pending Home Sales Index Report, and there's a tiny bit of good news. The index measures pending home sales, meaning those that are under contract but haven't yet gone through closing. The latest index, based on contracts signed in December, showed activity up 1% from November, and up nearly 11% from a year before.


But the housing market is still far from rosy. The Wall Street Journal reported this week that home ownership is down to its lowest level in a decade, with only 67.3% of Americans owning their own homes at the end of 2009.

Still, the bump in pending sales is a small victory for the real estate market overall. But for individual buyers or sellers who are still in the "pending" stage, figures are meaningless until you have a check or a new set of keys in your hand. The NAR says around 80% of homes under contract successfully go from "pending" to "sold" in about two months, but quite a few others do fall through. (From REITs to owning your own home, find out how diversify your portfolio with real estate assets, in
Here's how to make sure your pending sale survives to the closing.

• Have a Lender on Board. Better Yet, Have TwoMany deals evaporate when the financing falls through. Buyers should get pre-approved, if at all possible, and be clear on exactly what (if any) conditions must be met in order to get final approval. It's a good idea to have a back-up lender lined up, in case the first one falls through.
  
• Keep it CoveredMake sure the property is fully insured right up until the moment of closing. If you're a buyer, ask for a binder to cover your interest in the property during the "under contract" period. Otherwise, should a fire or other emergency happen before the closing – and this happens more often than you might think – you could be left high and dry. For sellers, resist the temptation to cut corners on your coverage once you have a perspective buyer.
  
• Inspect EarlyBy getting any required inspections done quickly, you can be sure you want to go through with the deal – or make any necessary adjustments/repairs – before the buyer is too emotionally and financially invested in the deal. For sellers, getting an early inspection gives you a chance to have problems repaired before they even become an issue in the negotiations.
  
• Stay Away from Short SalesYes, they're popular – and plentiful – these days, but short sales are also notoriously troublesome during the pending process. The process is time-consuming, involves a ton of paperwork and often ends up with the lender nixing the deal after all that work by both the buyer and seller.
  
• Look for Liens from the StartSome owners may be completely unaware of liens or other "clouds" on the title – until the buyer's attorney discovers it a week before the scheduled closing, and then the whole deal is off. This is a case where ignorance is definitely not bliss. Yes, it's possible that the lien could be a mistake, but by the time you clear it up your buyer may be long gone. Check for any problems on your property's title as soon as you decide to sell, and take care of them right away.

ConclusionAny real estate transaction can fall through, and there's no such thing as an ironclad deal until you've signed on the dotted line at closing. But by steering clear of these common pitfalls, you greatly increase your odds of going from "pending" to "sold" without any nasty surprises. (Hidden costs can create what looks like a good deal. Find out how to find the best mortgage possible

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4 Ways To Make The Most Of Low Interest Rates

Investing in a low interest rate environment takes much thought and sometimes a little creativity. Placing your money in a savings account, money market or even in a short-term certificate of deposit (CD) will yield you very little to zero after tax return, as banks are unable to offer higher rates since the Fed has left rates so low for so long. However there are some investments that can offer a higher rate of return in this environment.


Before discussing higher-returning instruments, let's take a step back and discuss the impact of inflation on your investments. Your real return is the nominal return (what the instrument says it returns), minus the inflation rate. Currently, inflation is not a worry, but economic theory suggests it may be an issue because the money supply has rapidly increased during this crisis, due to the economic stimulus. Inflation can be staved off by reducing the money supply or raising interest rates (which discourages borrowing and encourages savings). Therefore, investors need to watch for signs of inflation as the following suggested investments may be negatively impacted by the government's attempt to control it (Stocks have long been trumpeted as necessary to ensure a comfortable retirement. But does that advice still make sense?

Low Interest Rate Investments

1. High-Yielding Stocks
   High dividend yielding stocks can be very attractive in a low-interest environment. These are typically slower growth companies that throw off a lot of cash and require very little capital for investment. The dividend yield is the dividend per share/ price per share; typically, any company that has a dividend yield higher than 4-5% (which is typically considered the average yield for the S&P 500) is a high-yielding stock. Utilities are generally the prototypical high-yielding stocks, but there are others, as well. In addition to garnering the dividend, investors may also benefit from stock price appreciation, making the total return significantly higher than the 1-2% currently being paid by savings and money market accounts today.
   
2. Low-Cost StocksThere are also other stocks that may not provide the same attractive yields as Utilities, but do benefit from low interest rate environments, as the cost to borrow is very low. Teleco stocks are an example of an industry sensitive to interest rates because of the need to continually update networks and equipment, so this large capital expenditure type business has a cheaper cost of doing business, which eventually will benefit profits. Utilities also fall into this bucket.
   
3. "Safe" StocksIf you are a risk adverse investor and the stock market volatility frightens you, then you can buy safe instruments like U.S. treasuries or CDs. A strategy of staggering or laddering these investments, such that you own various maturities at various yields, will provide some protection should the interest rate environment change. That way, you do not have your monies tied up for too long a period of time, and can still achieve the return of a longer maturity instrument.
   
4. Real EstateReal estate typically is a good investment during low interest rates. This business is influenced by the mortgage rates, which are at a historically low point, thus providing the potential for large returns. However, we have been experiencing an atypical real estate market, and choosing properties prudently is the key to success, especially as prices have yet to stabilize.

ConclusionTaking advantage of the low interest rate environment to achieve higher returns than what is being offered by banking institutions for the typical savings instruments need not necessarily greatly increase investor's risk. As with all investments, being prudent, doing your homework and making sound judgments with your investments can provide investors with returns that exceed today's rates set by the Fed.

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Home-Equity Loans: What You Need To Know

A home-equity loan, also known as a second mortgage, lets homeowners borrow money by leveraging the equity in their homes. Home-equity loans exploded in popularity in 1996 as they provided a way for consumers to somewhat circumvent that year's tax changes, which eliminated deductions for the interest on most consumer purchases. With a home-equity loan, homeowners can borrow up to $100,000 and still deduct all of the interest when they file their tax returns. Here we go over how these loans work and how they may pose both benefits and pitfalls. 

Two Types of Home-Equity Loans
Home-equity loans come in two varieties - fixed-rate loans and lines of credit - and both types are available with terms that generally range from five to 15 years. Another similarity is that both types of loans must be repaid in full if the home on which they are borrowed is sold.

Fixed-Rate LoansFixed-rate loans provide a single, lump-sum payment to the borrower, which is repaid over a set period of time at an agreed-upon interest rate. The payment and interest rate remain the same over the lifetime of the loan.

Home-Equity Lines of CreditA home-equity line of credit (HELOC) is a variable-rate loan that works much like a credit card and, in fact, sometimes comes with one. Borrowers are pre-approved for a certain spending limit and can withdraw money when they need it via a credit card or special checks. Monthly payments vary based on the amount of money borrowed and the current interest rate. Like fixed-rate loans, the HELOC has a set term. When the end of the term is reached, the outstanding loan amount must be repaid in full.

Benefits for ConsumersHome-equity loans provide an easy source of cash. The interest rate on a home-equity loan - although higher than that of a first mortgage - is much lower than on credit cards and other consumer loans. As such, the number-one reason consumers borrow against the value of their homes via a fixed-rate home equity loan is to pay off credit card balances (according to bankrate.com). Interest paid on a home-equity loan is also tax deductible, as we noted earlier. So, by consolidating debt with the home-equity loan, consumers get a single payment, a lower interest rate and tax benefits.

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Benefits for Lenders
Home-equity loans are a dream come true for a lender, who, after earning interest and fees on the borrower's initial mortgage, earns even more interest and fees. If the borrower defaults, the lender gets to keep all the money earned on the initial mortgage and all the money earned on the home-equity loan; plus the lender gets to repossess the property, sell it again and restart the cycle with the next borrower. From a business-model perspective, it's tough to think of a more attractive arrangement.

The Right Way to Use a Home-Equity Loan
Home-equity loans can be valuable tools for responsible borrowers. If you have a steady, reliable source of income and know that you will be able to repay the loan, its low interest rate and tax deductibility of paid interest makes it a sensible alternative. Fixed-rate home-equity loans can help cover the cost of a single, large purchase, such a new roof on your home or an unexpected medical bill. And the HELOC provides a convenient way to cover short-term, recurring costs, such as the quarterly tuition for a four-year degree at a college.

Recognizing Pitfalls
The main pitfall associated with home-equity loans is that they sometimes seem to be an easy solution for a borrower who may have fallen into a perpetual cycle of spending, borrowing, spending and sinking deeper into debt. Unfortunately, this scenario is so common the lenders have a term for it:reloading, which is basically the habit of taking a loan in order to pay off existing debt and free up additional credit, which the borrower then uses to make additional purchases.

Reloading leads to a spiraling cycle of debt that often convinces borrowers to turn to home-equity loans offering an amount worth 125% of the equity in the borrower's house. This type of loan often comes with higher fees because, as the borrower has taken out more money than the house is worth, the loan is not secured by collateral. Furthermore, the interest paid on the portion of the loan that is above the value of the home is not tax deductible. (Find out how to determine whether refinancing will put you ahead or even more behind. 

If you are contemplating a loan that is worth more than your home, it might be time for a reality check. Were you unable to live within your means when you owed only 100% of the value of your home? If so, it will likely be unrealistic to expect that you'll be better off when you increase your debt by 25%, plus interest and fees. This could become a slippery slope to bankruptcy.

Another pitfall may arise when homeowners take out a home-equity loan to finance home improvements. While remodeling the kitchen or bathroom generally adds value to a house, improvements such as a swimming pool may be worth more in the eyes of the homeowner than the market determining the resale value. If you're going into debt to make cosmetic changes to your house, try to determine whether the changes add enough value to cover their costs.

Paying for a child's college education is another popular reason for taking out home-equity loans. If, however, the borrowers are nearing retirement, they do need to determine how the loan may affect their ability to accomplish their goals. It may be wise for near-retirement borrowers to seek out other options with their children.

Should You Tap Your Home's Equity?
Food, clothing and shelter are life's basic necessities, but only shelter can be leveraged for cash. Despite the risk involved, it is easy to be tempted into using home equity to splurge on expensive luxuries. To avoid the pitfalls of reloading, conduct a careful review of your financial situation before you borrow against your home. Make sure that you understand the terms of the loan and have the means to make the payments without compromising other bills and comfortably repay the debt on or before its due date.

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