By Lisa Gibbs, Money MagazineFebruary 23, 2011: 4:46 PM ET
(MONEY Magazine) -- When there was easy money to be made in real estate and stocks, mortgage debt seemed like nothing to fear. Now an increasing number of homeowners are wondering if it makes sense to hasten the day they can say goodbye to a big monthly expense while earning the equivalent of a decent, guaranteed return.
"I'm hearing this question more now that clients aren't feeling as comfortable about the market," says Los Angeles area financial planner Eileen Freiburger.
Maybe you're part of a young family, and whittling down your loan balance seems like a sound strategy. Or maybe you're counting down to retirement (perhaps even already kicking back), have only a few years of payments left, and are wondering if you should just knock off the balance.
But if you're thinking of such a move, you're also well aware that mortgage interest is tax-deductible -- and if history is any guide, putting money into stocks will earn you a higher return over the long haul than putting it into real estate.
The answers to the questions below can help you determine your best course of action.
Do you have more pressing financial needs?
Anyone who has credit card debt or isn't maxing out her 401(k) should make those the priority. You should also have at least six months' worth of living expenses in cash.
A few years ago you would have been able to pull money out of your home quickly if, say, you lost your job. Now that lenders have tightened up, that's not so easy.
Retirees and near-retirees contemplating a lump-sum payoff need to ensure they have enough liquid savings to handle emergencies such as unexpected medical expenses, especially because it's hard to tap equity on homes without first mortgages.
And you shouldn't pull money out of your IRA to pay off your home loan, since the IRA funds will be taxed at ordinary income rates.
How long do you plan to stay?
If you plan to trade up to a larger home or downsize to a smaller one within five years, it doesn't make sense to put extra money into your mortgage. The real estate market may be shaky for a while longer, and "you don't want to tie up your cash in your home and then not be able to sell," says La Jolla, Calif., financial planner Christopher Van Slyke.
What do you really gain from the interest tax deduction?
Assuming you itemize your deductions, you can find out what you save by multiplying the mortgage interest you paid last year by your tax rate (federal plus state). A couple in the 28% tax bracket, with a $200,000 loan at 5%, for example, will save $2,781 in taxes the first year of a loan.
'Substantial risk' of 25% drop in housing
Your tax savings decline the further you get into the loan, as more money is applied toward principal.
For many retirees and near-retirees close to the end of the mortgage, the interest deduction is not a reason to avoid paying off the loan, especially since retirees often end up in a lower tax bracket, says planner Peter Canniff of Nashua, N.H.
How would you otherwise invest the money?
Put your money into stocks and bonds and you're likely to get a higher return over the long run than you would paying off your home loan, given today's low rates.
If you itemize, you can calculate your effective return by multiplying your mortgage rate and your tax rate, then subtracting the answer from your mortgage rate (you can do this with the mortgage tax-deduction calculator at bankrate.com/calculators.aspx).
So for someone in the 28% tax bracket with a 5% mortgage, the effective rate of return on paying off the mortgage is 3.6%. By comparison, a 50/50 stock/bond portfolio has historically earned 8.2% long term, though it's sensible to expect future returns to be a more modest 6%.
Still, if you're very skittish about the market or are a retiree keeping a big chunk of money in low-earning CDs, you might do better by losing the loan, given that the average five-year CD is paying just 1.6%.
"For retirees, it's hard to beat the guaranteed return," says Anthony Webb, an economist at Boston College's Center for Retirement Research.
Will being debt-free help you sleep better?
In that case, you might be willing to forgo the extra return you could earn in the market. "Less stress, less worry," says Orlando-area planner Brian Fricke. "Sometimes that matters more than the math."
Friday, February 25, 2011
Friday, February 11, 2011
Home Affordability Returns to Pre-Bubble Levels .
The tough real estate market can be good news, see below.
By NICK TIMIRAOS
Home affordability returned to pre-bubble levels in a growing number of U.S. markets over the past year as price declines laid the groundwork for a housing recovery.
Housing Declines Again
Home values in the United States posted their largest quarterly decline since the first quarter of 2009, falling 2.6 percent as the temporary stimulus of the home buyer tax credits wore off, according to Zillow.com. See region-specific data.
.Data provided by Moody's Analytics track the ratio of median home prices to annual household incomes in 74 markets. By that measure, housing affordability at the end of September had returned to or surpassed the average reached between 1989-2003 in 47 of those markets. Most economists believe the housing boom took off in 2003.
During the boom, lax lending and speculation pushed house-price inflation far beyond the modest rise in household income. Nationally, the ratio of home prices to annual household income reached a peak of 2.3 in late 2005. But by last September, it had fallen to 1.6, matching the lowest level in the 35 years the data have been collected and well below the historical average of 1.9 between 1989 and 2003.
"Based on incomes, this is as affordable as it gets," said Mark Zandi, chief economist at Moody's Analytics. "If you can get a loan, these are pretty good times to buy."
But the bad news is that those price declines are leaving more borrowers underwater, or in homes worth less than the amount owed.
Nearly 27% of homeowners with a mortgage were underwater at the end of the fourth quarter, up from 23.2% in the previous quarter, according to data to be published Wednesday by Zillow.com, a real-estate website.
Many economists and housing analysts expect an additional decline of 5% to 10% before prices reach bottom later this year or early next year. Housing demand remains weak because buyers are skittish about the economy and lending standards are tight.
Markets that now appear to be undervalued include Detroit, Las Vegas, Atlanta and Phoenix. Even in such markets, high rates of foreclosure and underwater borrowers should keep downward pressure on prices. "They're undervalued, but they're going to get even more undervalued," said Mr. Zandi.
Measuring home prices relative to income is not the only way economists calculate housing affordability. They also examine the relationship between house prices and rents. Measured by the price-to-rent ratio—the price of a typical home divided by the annual cost of renting that home—prices are fairly valued, or undervalued, in around 20 markets. Nationally, the price-to-rent ratio stood at 14.85 at the end of September, above the 1989-2003 average of 12. The data suggest pockets of the country have further to fall.
Home prices still remain overvalued by both measures in several markets, including Seattle, Charlotte, New York and Portland, Ore.
Based on rents, "it's still not a slam dunk to buy" in those markets, said Mr. Zandi. He said markets appeared most overvalued in the Pacific Northwest, which was among the last regions to enter the housing downturn. Historical measures also showed prices were still high along the Northeast corridor from Baltimore to Boston.
The cost of owning a home looked less affordable based on rents than on incomes in part because rents also fell through 2009 and the first half of 2010. As rents rise, that could tip the scale back in favor of owning in some areas.
Of the 74 housing markets, Baltimore appeared to be the most overvalued. By contrast, prices in Cleveland, the most undervalued market, have returned to 1991 levels based on the price-to-rent ratio.
Historical measures comparing rents and incomes with home prices provide a useful gauge of affordability, but can be imperfect at measuring how close different markets are to recovering from a bubble.
After a severe housing downturn, home prices rarely stop falling once they reach equilibrium.
Some areas will stay undervalued for years as they deal with a glut of foreclosures and weak demand. Historical trends show housing could remain undervalued in many markets for six to seven years, according to economists at Capital Economics.
"It's become cheaper to buy than to rent" in Phoenix, said Jon Mirmelli, a real-estate investor in Scottsdale, Ariz., who is renting out foreclosed homes. "But the question is: Can you qualify for a loan?"
Meanwhile, some areas that appeared overvalued relative to historic norms, such as Washington, D.C., may not completely return to pre-crisis levels thanks to structural changes in the economy that support higher prices.
By NICK TIMIRAOS
Home affordability returned to pre-bubble levels in a growing number of U.S. markets over the past year as price declines laid the groundwork for a housing recovery.
Housing Declines Again
Home values in the United States posted their largest quarterly decline since the first quarter of 2009, falling 2.6 percent as the temporary stimulus of the home buyer tax credits wore off, according to Zillow.com. See region-specific data.
.Data provided by Moody's Analytics track the ratio of median home prices to annual household incomes in 74 markets. By that measure, housing affordability at the end of September had returned to or surpassed the average reached between 1989-2003 in 47 of those markets. Most economists believe the housing boom took off in 2003.
During the boom, lax lending and speculation pushed house-price inflation far beyond the modest rise in household income. Nationally, the ratio of home prices to annual household income reached a peak of 2.3 in late 2005. But by last September, it had fallen to 1.6, matching the lowest level in the 35 years the data have been collected and well below the historical average of 1.9 between 1989 and 2003.
"Based on incomes, this is as affordable as it gets," said Mark Zandi, chief economist at Moody's Analytics. "If you can get a loan, these are pretty good times to buy."
But the bad news is that those price declines are leaving more borrowers underwater, or in homes worth less than the amount owed.
Nearly 27% of homeowners with a mortgage were underwater at the end of the fourth quarter, up from 23.2% in the previous quarter, according to data to be published Wednesday by Zillow.com, a real-estate website.
Many economists and housing analysts expect an additional decline of 5% to 10% before prices reach bottom later this year or early next year. Housing demand remains weak because buyers are skittish about the economy and lending standards are tight.
Markets that now appear to be undervalued include Detroit, Las Vegas, Atlanta and Phoenix. Even in such markets, high rates of foreclosure and underwater borrowers should keep downward pressure on prices. "They're undervalued, but they're going to get even more undervalued," said Mr. Zandi.
Measuring home prices relative to income is not the only way economists calculate housing affordability. They also examine the relationship between house prices and rents. Measured by the price-to-rent ratio—the price of a typical home divided by the annual cost of renting that home—prices are fairly valued, or undervalued, in around 20 markets. Nationally, the price-to-rent ratio stood at 14.85 at the end of September, above the 1989-2003 average of 12. The data suggest pockets of the country have further to fall.
Home prices still remain overvalued by both measures in several markets, including Seattle, Charlotte, New York and Portland, Ore.
Based on rents, "it's still not a slam dunk to buy" in those markets, said Mr. Zandi. He said markets appeared most overvalued in the Pacific Northwest, which was among the last regions to enter the housing downturn. Historical measures also showed prices were still high along the Northeast corridor from Baltimore to Boston.
The cost of owning a home looked less affordable based on rents than on incomes in part because rents also fell through 2009 and the first half of 2010. As rents rise, that could tip the scale back in favor of owning in some areas.
Of the 74 housing markets, Baltimore appeared to be the most overvalued. By contrast, prices in Cleveland, the most undervalued market, have returned to 1991 levels based on the price-to-rent ratio.
Historical measures comparing rents and incomes with home prices provide a useful gauge of affordability, but can be imperfect at measuring how close different markets are to recovering from a bubble.
After a severe housing downturn, home prices rarely stop falling once they reach equilibrium.
Some areas will stay undervalued for years as they deal with a glut of foreclosures and weak demand. Historical trends show housing could remain undervalued in many markets for six to seven years, according to economists at Capital Economics.
"It's become cheaper to buy than to rent" in Phoenix, said Jon Mirmelli, a real-estate investor in Scottsdale, Ariz., who is renting out foreclosed homes. "But the question is: Can you qualify for a loan?"
Meanwhile, some areas that appeared overvalued relative to historic norms, such as Washington, D.C., may not completely return to pre-crisis levels thanks to structural changes in the economy that support higher prices.
10 Tips to Protect Your Home while Away on Vacation
RISMEDIA, February 11, 2011—With school vacations approaching, many lucky families are planning trips to cure their winter blues. Here are some important things to remember if you leave your home for several days.
1. Turn down your thermostat, but don’t shut it off. You shouldn’t set your thermostat any lower than 55 degrees in order to protect your pipes from freezing.
2. Arrange for snow removal in your absence in case there’s a storm while you are away. Massachusetts law requires residents to clear their own sidewalks and walkways six hours after a storm takes place and you’re not off the hook if you are out of town.
3. Make sure to hold the mail and newspaper. If you can’t have someone pick it up every day, it’s a sure giveaway that nobody’s home and can be a green light for burglars.
4. If possible, leave a key with someone you trust, preferably a neighbor and have them keep an eye on your home while you’re gone. Make sure to offer returning the favor and thank them with a gift when you return.
5. Unplug all electronics that don’t need to used like the television, coffee maker, and home computers.
6. Lower the temperature on your water heater.
7. If you can, leave a car in the driveway and use timers to turn on outdoor and indoor lights to give the impression that someone is home. Leaving the porch light on the entire time you’re gone is a bad idea. If you don’t have a timed light, you can leave an interior light on for the duration of your trip as long as you can’t easily notice it during the day.
8. As excited as you may be to go on vacation, avoid advertising it over Facebook and Twitter. Also, keep this in mind while posting updates from your cell phone on vacation.
9. If you have access to one, place all your valuables in a safe or safe deposit box.
10. Remember, if your house is on the market, you can ask your REALTOR® to stop by and check in. While you’re on vacation, it’s a great time for showings because you won’t have schedule conflicts.
If you follow these tips the next time you are out of town, you will most likely protect your house and your peace of mind.
1. Turn down your thermostat, but don’t shut it off. You shouldn’t set your thermostat any lower than 55 degrees in order to protect your pipes from freezing.
2. Arrange for snow removal in your absence in case there’s a storm while you are away. Massachusetts law requires residents to clear their own sidewalks and walkways six hours after a storm takes place and you’re not off the hook if you are out of town.
3. Make sure to hold the mail and newspaper. If you can’t have someone pick it up every day, it’s a sure giveaway that nobody’s home and can be a green light for burglars.
4. If possible, leave a key with someone you trust, preferably a neighbor and have them keep an eye on your home while you’re gone. Make sure to offer returning the favor and thank them with a gift when you return.
5. Unplug all electronics that don’t need to used like the television, coffee maker, and home computers.
6. Lower the temperature on your water heater.
7. If you can, leave a car in the driveway and use timers to turn on outdoor and indoor lights to give the impression that someone is home. Leaving the porch light on the entire time you’re gone is a bad idea. If you don’t have a timed light, you can leave an interior light on for the duration of your trip as long as you can’t easily notice it during the day.
8. As excited as you may be to go on vacation, avoid advertising it over Facebook and Twitter. Also, keep this in mind while posting updates from your cell phone on vacation.
9. If you have access to one, place all your valuables in a safe or safe deposit box.
10. Remember, if your house is on the market, you can ask your REALTOR® to stop by and check in. While you’re on vacation, it’s a great time for showings because you won’t have schedule conflicts.
If you follow these tips the next time you are out of town, you will most likely protect your house and your peace of mind.
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