Deed in Lieu of Foreclosure vs. Short Sale

Last updated on August 25th, 2020

It’s time for another mortgage match-up, with the latest in the series pitting the lesser known “deed in lieu of foreclosure” vs. the more popular short sale.

Nowadays, there are plenty of options to get rid of your home and avoid foreclosure, even if you owe more than the property is currently worth.

By avoiding the full-blown foreclosure process, you can reduce the negative impact to your credit score and ensure the lender won’t come after you for any deficiency balance.

Additionally, you may be able to purchase real estate and qualify for a mortgage much sooner if you go with one of these foreclosure alternatives.

What Is a Deed in Lieu of Foreclosure?


  • As the phrase “deed in lieu” suggests
  • Instead of the lender pursuing foreclosure and taking your home
  • They will allow you to voluntarily deed back your property
  • It’s basically a preemptive forfeiture of the home in exchange for some benefits

In short, a deed in lieu of foreclosure is exactly what it sounds like. Instead of foreclosure, you agree to voluntarily deed your property to the lender.

In exchange for this transfer of ownership, the lender will release the associated lien (mortgage), allowing you to move on with your life.

However, banks will only agree to a deed in lieu if you keep the property in good shape and meet some sort of hardship requirements.

The trade-off is that the bank gets a property free from damages typically associated with foreclosure, and they don’t need to deal with costly foreclosure proceedings.

Of course, with home prices much lower now than they once were, properties are often being dumped for less than what is owed on the mortgage.

As a result, the lender may be able to come after you for the deficiency balance, or the shortfall between the current property value and the loan balance, depending on state foreclosure laws.

If this is the case, you may be on the hook for all or part of the shortfall, which clearly isn’t ideal if you can’t even afford your mortgage payments.

It certainly won’t make your tax returns any more pleasant, especially after surrendering the property to the lender.

This is why it’s imperative that you negotiate with the lender to forgive any deficiency balance before agreeing to one of these deed in lieu of foreclosure agreements. And to get it in writing!

You must also do this with any junior liens, or second mortgages (or thirds). If you don’t, those lenders can come after you for any shortfall in certain situations.

Finally, you’ll want to determine if the Mortgage Forgiveness Debt Relief Act applies to your situation.

Even if the lender doesn’t come after you for any money, Uncle Sam still might by way of tax liability. So there are two potential pitfalls you must try to avoid.

Why Choose a Deed in Lieu?

  • There are several possible advantages to a deed in lieu
  • Including less credit score damage (see chart below)
  • A shorter waiting period to get another mortgage in the future
  • And less required work (compared with a short sale)

Aside from avoiding an outright foreclosure, a deed in lieu may be the quickest option to part with your home if you don’t qualify for some other form of relief, such as a mortgage refinance or a loan modification.

Instead of being tasked with selling your home and waiting for the bank to accept the short sale offer, you can have the bank take care of it.

However, the bank may still ask that you list the property for a period of time before agreeing to a deed in lieu.

Also, a deed in lieu may not be nearly as bad as a foreclosure with regard to your credit score. It will still hurt your credit, but the impact could be less, assuming there is no deficiency balance.

Credit Score Impact of a Deed in Lieu

deed in lieu impact

Check out the credit score impact of a deed in lieu as opposed to a foreclosure, according to FICO. It’s still not great, but it probably won’t do as much damage as a foreclosure.

On top of that, you’ll be able to qualify for a new home loan in a shorter period of time.

Instead of waiting up to seven years after a foreclosure, you may only need to wait as few as two years if you have extenuating circumstances, or four years under normal circumstances.

Lastly, you may be able to stay in your home with a deed in lieu if the lender offers a “Deed-for-Lease” option, as Fannie Mae and Freddie Mac now do (along with Bank of America). Or you may receive some spending money for relocation costs.

For example, Fannie Mae has a so-called “Mortgage Release” program that provides options such as vacating a home immediately, staying for up to three months rent-free, or leasing the home at fair market rates for up to a year. This can be especially helpful if you have limited monthly income.

They may also provide relocation assistance (up to $3,000 to help you move and find a new residence), while also eliminating your remaining mortgage debt. That sounds a lot better than a foreclosure, doesn’t it?

What About a Short Sale?

  • The downside here is that you actually have to do some work
  • As the name suggests you’ve got to sell the place
  • And you need to do so with the approval of your lender
  • This can be time-consuming and a major burden during what is probably already a stressful time

I’ve already written extensively about short sales, which are probably the most popular foreclosure alternative available today.

Put simply, you must convince the lender to allow you to sell your property for less than the associated mortgage balance.

The downside is that you must list your home for sale, which obviously takes work, results in people tracking mud through your home, dealing with annoying real estate agents, and can take many (many) months to finalize.

First off, you need the bank to approve the sale, and secondly, you need to close the deal. It’s a lot more difficult to sell homes these days, so it can be quite a pain.

It’s basically a home sale without the profits at the end, but it might beat the foreclosure process.

However, new rules have sped up short sales, and now that they’re so commonplace, the process can be a lot more effortless.

The result is similar to a deed in lieu in that you are released from the loan once the home is sold, and you avoid foreclosure.

Again, you must ensure that there isn’t a deficiency balance to avoid owing any money on your tax returns after the deal is done.

And if there are second or third liens, they must also be dealt with.

Tip: If you complete a short sale or deed in lieu via the Home Affordable Foreclosure Alternatives (HAFA) program, the deficiency balance must be waived.

The advantages of a short sale are like a deed in lieu in that you can reduce the credit score impact and get a new mortgage sooner. You may also be offered a financial incentive to short sell.

The drawback is that a short sale may be more time consuming and tedious. However, banks are probably more willing to approve a short sale than they are a deed in lieu, especially if there is another mortgage loan is involved.

Though beginning in March, Fannie and Freddie will allow borrowers with illness or the need to relocate for a job apply for a deed in lieu, even if current on their mortgages. This just so happens to be taking place when home prices are on the rise…

In either a short sale or deed in lieu, there are also potential tax consequences, so consult a CPA and/or a lawyer before deciding which choice is best for you, if either. And pay attention to any legal updates on foreclosure laws, as they can change over time.

Read more: Foreclosure vs. short sale


Payment Deferral Will Be an Option to Repay Mortgage Forbearance

Last updated on June 23rd, 2020

The Federal Housing Finance Agency (FHFA) announced today that Fannie Mae and Freddie Mac have launched a new payment deferral option in light of the unprecedented disruption caused by the coronavirus.

The new workout option, known as “COVID-19 payment deferral,” was specifically designed by Fannie Mae and Freddie Mac to help those affected by a temporary hardship related to COVID-19.

The goal is to help borrowers in a simple and straightforward manner achieve current loan status after up to 12 months of missed mortgage payments.

How COVID-19 Payment Deferral Works

  • The delinquent amount is moved into a non-interest bearing balance
  • No payments are made toward this balance and mortgage remains otherwise changed
  • It is due at maturity or earlier if mortgage is refinanced or home sold
  • No trial period is necessary and runs through automated process to expedite

The way payment deferral works is pretty simple, which is the entire point of offering it.

Say a borrower missed 12 mortgage payments that were $2,000 each. That $24,000 would be set aside in a non-interest bearing account.

It would not need to be paid down or touched at all until the homeowner either refinanced their mortgage, sold their home, or otherwise reached maturity based on the original loan term.

The borrower’s original mortgage would remain unchanged otherwise, meaning they’d resume making the $2,000 monthly payment they were accustomed to making before COVID-19 disrupted their income.

This would make getting back on track very straightforward, and hopefully doable for most homeowners, assuming they are re-employed or find new work.

Eligibility for a COVID-19 Payment Deferral

  • Borrower must be on a COVID-19 related forbearance plan and unable to reinstate loan in full
  • Borrower must have a hardship resulting from COVID-19 such as illness, unemployment, or reduced income
  • Loan servicer must determine delinquency was temporary and borrower has ability to repay mortgage
  • Must confirm borrower has resolved hardship and is committed to resolve the delinquency
  • Loan must have been current or less than 31 days delinquent as of March 1, 2020

In order to be eligible for the COVID-19 Payment Deferral option, you must be in a COVID-19 related forbearance plan and able to resume regular mortgage payments.

This includes forbearance plans such as the one offered under the CARES Act, along with proprietary plans offered by individual banks, assuming Fannie or Freddie own your mortgage.

At the same time, you must be unable to fully reinstate your mortgage at the end of the forbearance period or unable to afford a repayment plan.

Additionally, the hardship has to be a result of COVID-19, not for some unrelated reason. To that end, the mortgage should have been current or no more than 31 days late as of March 1st, 2020, before this all began.

It should also be 31 or more days (one month) delinquent but less than or equal to 360 days (12 months) delinquent as of the date of payment deferral evaluation.

The loan servicer will achieve a so-called “Quality Right Party Contact,” or QRPC, in which they determine the reason for delinquency and whether it’s temporary or permanent.

This includes determining if the borrower has the ability to repay the mortgage debt, educating the borrower on workout options, and obtaining a commitment from the borrower to resolve the delinquency.

Lastly, the servicer must confirm that the borrower has resolved the hardship, though they are not required to obtain documentation of the borrower’s hardship.

The servicer must complete the COVID-19 payment deferral in the same month in which borrower eligibility is determined, though they will be granted a processing month.

So if your mortgage is 12 months delinquent as of the date of evaluation, you must make your full monthly mortgage payment during the processing month in order to receive the payment deferral.

Note that while loan servicers may report the status of payment deferral to the credit bureaus, they cannot charge the borrower administrative fees, late fees, penalties, or similar charges.

This means it shouldn’t count against you, though I did discuss the idea of forbearance preventing you from getting another mortgage.

Those who are unable to resume mortgage payments will be evaluated for other options, such as a Flex Modification that lowers payments via interest rate and/or loan term adjustments.

Overall, this confirms what we knew was coming and is excellent news for homeowners in forbearance plans.

It means they can continue making regular mortgage payments if affordable, as opposed to being forced to pay a lump sum or go on a repayment plan.

And the missed payments won’t be due until they refinance, sell their home, or the loan term ends.

The bad news is this might cause even more homeowners to opt for mortgage forbearance.

If you have an FHA loan and requested forbearance, they have a similar offering known as a “COVID-19 Standalone Partial Claim,” which is also a no-interest, junior lien that requires no payments and isn’t due until payoff, sale of your property, or when refinancing.

Those with VA loans are allowed to defer any missed payments and pay them at the end of the loan term along with the final payment.

Additionally, the VA requires any forborne payments to be non-interest bearing, meaning you won’t be penalized for doing so.

You may also be given the option to pay toward that deferred amount over time via a repayment plan or request a loan modification if unable to resume regular payments.

Read more: There Will Be a 3-Month Waiting Period to Get a Mortgage After Forbearance


Smart Ways to Build Equity in Your New Home

Now that you’ve invested in a home, how do you increase its value?

That’s called “building equity.” Equity is the market value of your home or property, minus your outstanding mortgage debt. So, for example, if you can sell your home for $450,000 and you still owe $100,000, you have $350,000 in equity. Building equity is one the biggest financial benefits of ownership.

If you live in a market where home values are rising, yours may float up with the rising tide and your equity will increase without doing a thing.

Or you can work on growing your home’s value by decreasing the amount you owe and/or increasing the value of your property. Here are some ways to do both.

Mortgage payments

Part of every mortgage payment goes towards paying off your loan’s principal and interest, with most of the payment going to interest in the loan’s early years. You can use Zillow’s amortization calculator to estimate how much money will be paid over the life of your loan for principal and interest. If you pay down the principal faster, your equity should increase faster. This can be done a few different ways.

Paying more: If you have a 30-year mortgage, adding more to your payment either monthly or when you have extra cash can help you gain equity. If you pay more, make sure your lender applies it to your principal. This is a great way to use your tax refund, a bonus from work or an inheritance.

Paying faster: You could divide your monthly mortgage payment into two bi-weekly payments, for a total of 26. So instead of 12 payments a year, you make the equivalent of 13, paying down your mortgage faster and gaining more equity. But make sure to check with your lender first to make sure they accept bi-weekly payments. And make sure all the extra money goes immediately to the principal instead of waiting for the second half-payment. Reputable lenders will not charge a fee for bi-weekly payments.

Refinancing: If you have a 30-year mortgage, you might want to consider refinancing to a 15-year loan, which has a lower rate. Most consider this worthwhile only if you can drop your interest rate by at least 1.5%. Factor in any closing costs before making this move. Also make sure your mortgage doesn’t have a penalty for pre-payment. It’s not common, but it’s better to check.

Before you decide on any of these options, consider if it’s really the best use of your money. If you’re not maxed out on employer-matched saving accounts, perhaps you should be putting extra money into your 401(k) rather than paying off a low-interest mortgage. It’s smart to talk with a financial advisor to determine the best investment strategy for you.

Also make sure you have an emergency fund, typically 6 months of savings in case you fall ill or lose a job.

Renovate wisely

Making smart improvements and adding the right amenities to your home can also increase its market value, which means more equity for you.

How do you know which projects will bring the best return on your investment? Even though you’ve just moved into your new place, there are home improvements buyers typically love: bathrooms, attics, entrances, kitchen updates, garage doors and siding. Popular features can vary by area and home type, so consider what’s in demand in your market.

Also, be mindful of your market as you’re thinking about how much to invest in improving your home. The realities of a buyers or sellers market will have an impact on how much return you’ll get when you sell.

You can find more inspiration, ideas and guidance in Zillow Porchlight home improvement articles.

For new homeowners, Zillow’s design and home improvement videos show you how to tackle your first project.


The Difference Between Credit Card Refinancing and Debt Consolidation

  • Credit Card Debt

Average credit card debt in the US changes depending on who you ask and where they get their information. In 2019, Experian estimated this to be $6,194, while a leading credit site produced a figure closer to $8,000. At the same time, data pooled from the US Census and Federal Reserve calculated a more modest $5,700, which is likely to be the most reliable figure.

In any case, there’s one thing that researchers can agree upon: This is a growing problem and it won’t be going away any time soon.

The good news is that credit scores are improving, and debtors have never had more options for clearing their debts, including consolidation and refinancing.

In this guide, we’ll look at both of these options and more, covering cash-out refinance plans, balance transfer consolidation, and more, giving you the knowledge and tools needed to clear your credit card debt and get back into the black. 

What is Credit Card Refinancing?

Credit card refinancing generally refers to a balance transfer, although it has also been used to refer to debt consolidation. In both cases, you refinance one loan or debt with another, often keeping the same balancing but adjusting the terms to something more manageable.

We’ll show you how you can properly refinance your debts in this guide as we look at both consolidation and refinancing.

How Does it Work?

A balance transfer moves all your credit card debt onto a new card provided by a new lender. These cards offer 0% APR introductory rates to tempt new customers and these rates mean you can avoid paying interest throughout that period, which typically lasts for 12 to 18 months.

If you have a $5,000 balance with a 20% APR, this switch could save you $500 in the first year. That’s $500 more towards your balance and if you continue making the monthly payments, the debt will reduce significantly by the end of the year and the 0% introductory period.

If that sounds too good to be true, it is. Sort of. These cards can help to shoulder some of your financial burdens and in certain circumstances, they are lifesavers, but there are a few downsides. Firstly, these cards typically charge a fee that can be as high as 5% of the balance. On the aforementioned $5,000 debt, that’s $250. 

Secondly, at the end of the introductory period, the interest rate will kick-in and this is often charged at a premium. If you use this period to avoid paying interest and not to reduce your debt, you could end up in a worst position than when you started.

Who is Refinancing Right for?

You will need a fairly clean credit report and a respectable credit score to get a high-limit credit card. There are multiple cards with 18-month introductory periods, 3% transfer rates and APRs that go as low as 16% once the 0% period ends. 

As soon as you drop below the 700s, you’ll struggle to get any of these and if you drop below 580, you’ll find it difficult to get anything at all, let alone something large enough to cover your current credit card debt.

How Does Refinancing Credit Cards Affect Credit?

If you finance your credit card debt you’ll see an instant improvement in your debt-to-income ratio, which compares your gross income to all debt payments (including student loan debt, credit card debt, mortgage debt, etc.). This figure is imperative for your financial health and needs to be considered before you shop for mortgage rates or acquire any new debt, because if it’s too high then you may struggle to make payments and could face financial ruin.

An improvement in this ratio, therefore, is always beneficial. The problem is, it doesn’t have any impact on your credit score. One of the ways that refinancing will impact your score is by initiating a hard inquiry, which follows all new loan and credit card applications. This can reduce your score by as many as 5 points.

Opening a new account will also reduce your score. If you’re consolidating several debts into one, then those debts will clear and that will improve your score in the short-term and the long-term. Generally speaking, it’s always beneficial for your long-term credit score and financial wellbeing but be prepared for a short-term reduction. 

Can You do a Balance Transfer with Multiple Cards?

You can generally transfer anywhere up to five balances, providing they all remain within the specified credit limit. Balance transfer applications often include sections for multiple debts and cards. Input the details of all your credit card debt into these sections and then wait for them to finalize the decision process, being sure to keep making your payments while you do.

You cannot, however, transfer money into cards offered by the same lender. This may seem counterintuitive, but it’s important to remember that balance transfer cards and their 0% introductory rates are used to attract new customers, hopefully beginning a process that will see the customer fall into a cycle of debt. If they already have you as a customer and you’re already trapped in that cycle, they don’t have much to gain by offering you a 0% balance transfer. 

Credit Card Refinancing vs Debt Consolidation

Debt consolidation is often used interchangeably with refinancing and there are many similarities and programs that provide both options. The ultimate goal of these options is also the same, but there are some key differences.

How is Credit Card Refinancing the Same as Debt Consolidation?

The goal of consolidation is to swap many large minimum payments and escalating interest rates for one manageable monthly payment and respectable interest rate. Refinancing works in a similar way and aims to achieve the same result, albeit with some key differences.

The main difference between these two concerns how the original debts are dealt with. With refinancing, you’re moving all current debt to a new credit card via a balance transfer. Your original credit card debt is repaid, and your attentions shift to your new card.

When you consolidate credit card debt, your original debt is paid off and your focus is shifted to a new debt, preferably with a lower annual percentage rate and more favorable interest terms.

Tips for Credit Card Refinancing

If you’ve decided that credit card refinancing is the best way to clear your credit card debt, then keep the following in mind to ensure you get the best deal:

Monitor Your Credit Score

Your credit score will play a massive role in determining the sort of rate you’re offered. 50 points could be the difference between a card that has a short introductory period and a high-interest rate, and one that has 0% for 18 months and provides a respectable APR. Those 50 points can be gained in as little as a month or two depending on your situation.

We have a complete guide on How to Improve Your Credit Score Quickly that you can read to better understand what your options are, but here are a few quick tips to help:

  • Pay More: If you have extra cash at the end of the month then use it to pay towards the debt with the highest interest rate. This will reduce the compounded interest, which in turn will reduce the term and the total amount you pay. Both of these will improve your score long-tern, but the greater balance reduction will also help the next time your score is calculated.
  • Increase Limits: You can increase limits of active credit cards to give your credit utilization a boost. This accounts for 30% of your total score, so it makes a big difference.
  • Look for Mistakes: If you notice any mistakes on your credit report, dispute them. These are much more common than you might think and by disputing them you can remove them and improve your score.
  • Be Careful with Hard Inquiries: Credit scoring systems allow something known as “rate-shopping” whereby all applications for the same type of loan are included in one hard inquiry providing they take place in a fixed period. However, this is not true for credit cards, and all applications will count as a separate inquiry. Be very careful when comparing balance transfer cards and make sure you don’t agree to any hard inquiries unless they are absolutely essential.

Look for an Introductory Period

You need a 0% introductory period of at least 12 months, but there are many cards that extend this to 18 months. Anything less may not give you the time you need to get your finances in order and start making those crucial payments.

Check the Transfer Rate

The transfer rate is displayed as a percentage and can vary considerably. Even a difference of 2% (between the lowest average of 3% and the highest average of 5%) can account for $400 on a debt of $20,000.

Don’t Neglect Rates and Penalties

If a card is offering terms that seem too good to be true, you need to do a little digging. Look at the terms and conditions to discover what the APR will be when the introductory period ends and what sort of penalties they charge. The 0% introductory period is a massive positive, so it’s okay if the other terms are a little worse than what you have now. But there’s a line, and you don’t want to go from 16% interest to 26%, for instance.

Start Repaying

The purpose of these cards is not to give you a break from interest payments so that you can pump more money into your vacation fund or buy that new games console you’ve had your eye on. That might be what the lender (secretly) wants, but to get the maximum benefit out of balance transfers you need to repay all or most of your debt during the introductory period.

Use this opportunity to reduce the debt by as much as you can because every cent you pay is one less cent for future interest to be calculated against.

Keep it Open

Don’t be tempted to cancel the card as soon as your debt has been repaid as this will greatly reduce your credit utilization ratio, which will impact your credit score. Instead, keep the card active, but try not to use it except for in emergencies and when you’re 100% confident you can clear the balance at the end of the month.

Tips for Acquiring a Consolidation Loan

There are companies that specialize in providing consolidation loans, both in the form of student loans and personal loans. These companies work by repaying your debts with a single, large consolidation loan—leaving you with just one payment to make every month and one debt to worry about.

But much like refinancing, consolidation is not without its issues. To make sure you get the best deal and are mot burdened with more debt than you can afford, remember to:

Check the Total Interest

Many consolidation loans work by reducing the interest rate and minimum payment but increasing the term. On the surface, it looks like you’re getting a great deal, but in reality, you could be paying two or three times as much during the lifetime of the loan.

Use a loan calculator to determine how much the consolidation loan will cost you over the term. A lower interest rate and monthly payment is great and in the short-term, it can provide a huge boost to your finances, but you don’t want to be stuck with a loan that requires you to pay more in interest than the principal.

Understand the Impact on your Credit Report

Some consolidation loan companies, particularly those in the debt management sector, will insist that you close all but one credit account. This removes temptation, but once those old accounts close and are replaced by a brand new one, it will also remove a sizeable chunk of your credit score.

This is not true if you do it yourself using a personal loan, but this can be a risky option and isn’t suitable for anyone with a less-than exceptional credit score.

Don’t Miss a Payment

It should go without saying, but it’s crucial that you never miss a payment on your new loan. Doing so could drastically reduce your credit score and reduce your chances of acquiring a loan or line of credit in the future. 

If you’re on a debt management plan, missing a payment could result in the lenders scrapping their agreement and demanding that you return to your original terms. Even if you have a personal loan it’s important to keep meeting those payments on time as each late payment will appear on your credit report and reduce your credit score.

Look at Other Options

When you have taken the above into consideration, you need to ask yourself if a consolidation loan is the best option for you. Is it the cheapest, easiest, and most hassle-free way for you to escape debt? Are there other debt relief options that are more suitable?

There are other ways to consolidate credit card debt. Refinancing might be a more viable alternative, but you can also look into debt settlement. We have written about debt settlement extensively already and while it’s not perfect and can make your situation worse, it’s also ideal for people who feel like they are at the end of the line and are being rejected by lenders despite having access to a steady income.

Choosing Between a Debt Consolidation Loan and Credit Card Refinancing

Refinancing is a great option if you have a lot of credit card debt and a high credit score, as that way you’re almost guaranteed a prolonged introductory period and a high fixed rate of interest. However, if your score is low, your options are a little more limited. There is no origination fee to worry about, but there is a balance transfer fee, there may be high penalties, and the interest rate you’re offered at the end of the introductory period will be high.

In such cases, you should look into debt management or a fixed-rate loan, both of which will seek to clear all of your credit card debt and leave you with more manageable payments. Your credit score may take a significant hit in the short-term, but you’ll be much better off a few months later and can look forward to a brighter financial future.


Your Home Tax Deduction Checklist: Did You Get Them All?

Welcome to your home tax deduction checklist! For homeowners, this kind of guidance is essential in the wake of all the changes ushered in by the new tax plan, the Tax Cuts and Jobs Act, that are still rolling in.

The biggest change for 2020? The standard deduction jumped a couple of hundred dollars for taxpayers—to $12,400 for individuals, $18,650 for heads of household, and $24,800 for married couples filing jointly. And this higher number means you need to dig in to all of your home expenses to see if their total sum tops the standard deduction, depending on your filing status. (If the total doesn’t surpass it, then you’ll just take the standard deduction on your taxes when you file.)

To help, here’s a list of all the tax breaks for homeowners.

Mortgage interest

In the past, you could deduct the interest from up to $1 million in mortgage debt (or $500,000 if you filed singly).

“But for loans taken out from Dec. 15, 2017, onward, only the interest on the first $750,000 of mortgage debt is deductible,” says William L. Hughes, a certified public accountant in Stuart, FL.

Mortgages are structured so that you start off paying more interest than principal. For example, in the first year of a $300,000, 30-year loan at a fixed 4% interest rate, you’d be deducting $10,920. (To find out how much you paid—or will pay—in mortgage interest any year, punch your numbers into our online mortgage calculator.)

Note that taking this deduction under the new tax law does require itemizing deductions, but it may be worth the hassle, especially for new homeowners.

Mortgage points

If you bought a home and paid points, then you can still deduct those from your taxes. They must be “true,” or discount, points, not origination points. After all, points are essentially mortgage interest that you prepay, so it makes sense that they’d be treated like the rest of your mortgage interest. Each point is 1% of the loan amount, so if you paid 2 points on that $300,000 loan, you can deduct $6,000.


Watch: 5 Pet-Related Tax Deductions We Bet You Didn’t Know Of


Private mortgage insurance

For now at least, Congress has renewed this deduction.

If you can’t make a 20% down payment on your home, most lenders require that you pay private mortgage insurance, or PMI. The upside: It’s tax-deductible as long as your adjusted gross income is less than $100,000. (For each $1,000 you make after that, you can deduct 10% less of your PMI, up to $109,000.) PMI is generally between 0.3% and 1.5% of the loan amount annually, so on a $300,000 loan, you’d be deducting between and $900 and $4,500.

Home equity debt interest

Homeowners often take out a home equity loan or home equity line of credit in order to tap into some quick cash—for college, weddings, home improvements, or otherwise—using their home as collateral. And up until 2017, homeowners could deduct the interest on home equity debts up to $100,000 for married joint filers.

Now? “Home equity debt interest deductions have been eliminated,” says Eric Bronnenkant, a certified public accountant and financial planner, and head of tax at Betterment. That is, unless you spend the money on one thing only: home improvements.

So if you’re eager to renovate that kitchen, this deduction still stands. But if you have to foot the bill for your daughter’s wedding, the IRS will no longer pitch in, explains Amy Jucoski, a certified financial planner and national planning manager at Abbot Downing.

And unlike mortgage interest deductions, the new rules on home equity debt apply to all loans regardless of when they were taken. And to reap the benefit, your total debt—meaning your mortgage plus your home equity loan—can’t be more than the new $750,000 cap.

Property taxes

In the good ol’ days of 2017, your property taxes were fully tax-deductible.

This tax season, there’s a $10,000 cap on the combined amount of your property taxes, state and local income taxes, and (for states without income tax) deductible sales tax.

One bright side for landlords and those with vacation homes: “You can take deductions for all the properties you own, plus add your state income tax,” says Steven Weil, president of RMS Accounting, in Fort Lauderdale, FL.

Energy-efficient upgrades

Did you add solar panels or a solar-powered water heater last year? That means you can help yourself to a tax credit.

According to Bishop L. Toups, a taxation attorney in Venice, FL, qualifying solar electric panels and solar water heaters are good for a credit of 26% of the cost of the equipment and installation. For a $30,000 green investment, that’s a cool $7,800 back!

To qualify, the solar panels have to generate at least half of the energy used by the home, they have to be installed in your primary residence, and they can’t be used to heat a pool or hot tub. (Sorry!)

The credit will drop to 22% until the end of 2021 and then go away.

Home office deduction

The home office tax deduction disappeared for all W-2 employees who have an office elsewhere that they could use if they wanted to. The only people who can continue taking this deduction are those who truly run their own business from home, says Joshua Hanover, a senior manager at Marks Paneth.

Using the simplified home office deduction, self-employed people can take $5 for every square foot of office space, up to a maximum of 300 square feet. For a 200-square-foot home office, you’re looking at a nice $1,000 deduction. Just don’t try any funny stuff—it has to be a dedicated home office, used only for work. Here’s more on the home office tax deduction.

For more smart financial news and advice, head over to MarketWatch.


Tax Deductions on Home Equity Loans and HELOCs: What You Can (and Can’t) Write Off

Do you have a home equity loan or home equity line of credit (HELOC)? Homeowners often tap their home equity for some quick cash, using their property as collateral. But before doing so, you need to understand how this debt will be treated come tax season.

With the 2018 Tax Cuts and Jobs Act, the rules of home equity debt changed dramatically. Here’s what you need to know about home equity loan taxes when you file this year.

Acquisition debt vs. home equity debt: What’s the difference?

For starters, it’s important to understand “acquisition debt” versus “home equity debt.”

“Acquisition debt is a loan to buy, build, or improve a primary or second home, and is secured by the home,” says Amy Jucoski, a certified financial planner and national planning manager at Abbot Downing.

That phrase “buy, build, or improve” is key. Most original mortgages are acquisition debt, because you’re using the money to buy a house. But money used to build or renovate your home is also considered acquisition debt, since it will likely raise the value of your property.

Home equity debt, however, is something different.

“It’s if the proceeds are used for something other than buying, building, or substantially improving a home,” says Jucoski.

For instance, if you borrowed against your home to pay for college, a wedding, vacation, budding business, or anything else, then that counts as home equity debt.

This distinction is important to get straight, particularly since you might have a home equity loan or HELOC that’s not considered home equity debt, at least in the eyes of the IRS.

If your home equity loan or HELOC is used to go snorkeling in Cancun or open an art gallery, then that’s home equity debt. However, if you’re using your home equity loan or HELOC to overhaul your kitchen or add a half-bath to your house, then it’s acquisition debt.

And as of now, Uncle Sam is far kinder to acquisition debt than home equity debt used for non-property-related pursuits.

Interest on home equity debt is no longer tax-deductible

Under the old tax rules, you could deduct the interest on up to $100,000 of home equity debt, as long as your total mortgage debt was below $1 million. But now, it’s a whole different world.

“Home equity debt interest is no longer deductible,” says William L. Hughes, a certified public accountant in Stuart, FL. Even if you took out the loan before the new tax bill passed, you can no longer deduct any amount of interest on home equity debt.

This new tax rule applies to all home equity debts, as well as cash-out refinancing. That’s where you replace your main mortgage with a whole new one, but take out some of the money as cash.

For example, say you initially borrowed $300,000 to purchase a home, then over the course of time paid it down to $200,000. Then you decide to refinance your loan for $250,000 and take that extra $50,000 to help your kid pay for grad school. That $50,000 you took out to pay tuition is home equity debt—and that means the interest on it is not tax-deductible.

Limits on tax-deductible acquisition debt

Meanwhile, acquisition debt that’s used to buy, build, or improve a home remains deductible, but only up to a limit. Any new loan taken out from Dec. 15, 2017, onward—whether a mortgage, home equity loan, HELOC, or cash-out refinance—is subject to the new lower $750,000 limit for deducting mortgage interest.

So, even if your sole goal is to buy, build, or improve a property, there are limits to how much the IRS will pitch in.

When in doubt, be sure to consult an accountant to help you navigate the new tax rules.

For more smart financial news and advice, head over to MarketWatch.


Value of U.S. Housing Market Hits Another All-Time High

Posted on October 29th, 2020

In the second quarter of 2020, the U.S. housing market hit an all-time high of $32.8 trillion, per The Federal Reserve’s Flow of Funds Report, as referenced in the latest Monthly Chartbook from the Urban Institute.

That was up from roughly $32.4 trillion in the first quarter of 2020, thanks to an increase in home equity from $21.1 trillion to $21.5 trillion.

Meanwhile, outstanding mortgage debt remained steady at $11.3 trillion, which tells us most borrowers are paying down existing mortgages and/or applying for rate and term refinances to lower monthly payments.

And that’s a good thing because it means most homeowners aren’t overleveraged like they were back in 2006, before the housing crisis ushered in the Great Recession.

Looking at it a different way, American homeowners have a collective loan-to-value ratio (LTV) of about 34%.

The Housing Market Appears to Be Healthy Despite Record Home Prices

value of housing market

  • U.S. property values continue to rise as mortgage debt keeps falling
  • American homeowners have a collective loan-to-value ratio (LTV) of about 34%
  • Mortgage debt is essentially unchanged from 2006 while home values have risen nearly $8 trillion
  • This means today’s homeowners are in good shape overall, but it’s harder for new buyers to enter the market

While one could always express caution when prices hit all-time highs, you’ve got to consider more than just the price.

More important is to look at housing affordability and the debt held by existing homeowners.

Fortunately, U.S. homeowners only carry a collective $11.3 trillion in mortgage debt, which appears to be flat or even lower than total housing debt back in 2006.

There are several reasons why today’s homeowners are carrying a lot less mortgage debt. For one, most haven’t tapped their equity.

Very few homeowners these days have applied for cash out refinances or pulled equity via home equity line of credit or home equity loan.

cash out share

Instead, they’ve been paying down their home loans each month, enjoying tailwinds propelled by record low mortgage rates.

Simply put, homeowners owe less and pay more in principal with each monthly payment, creating a housing market that is less leveraged.

This is a good thing for individual households and for the housing market as a whole because it means borrowers aren’t overextended, and have options if they’re unable to keep up with monthly payments.

A decade ago, mortgage payments often weren’t affordable because of so-called exploding ARMs that reset much higher after the borrower enjoyed an initial teaser rate.

And because they didn’t have any skin in the game, aka home equity, they couldn’t refinance to seek out payment relief.

That led to a flood of short sales and foreclosures, and eventually the creation of widespread loan modification programs such as HAMP and HARP.

Today, even if a homeowner falls behind due to COVID-19 or another setback, they could potentially sell for a tidy profit and move on.

This protects both that individual and their local housing market, which might otherwise suffer from declining property values due to the presence of distressed home sales.

In summary, this is why today’s housing market is very different than the one we experienced more than a decade ago, despite some economists seeing home prices in “bubble territory.”

But What About Housing Affordability Today?

  • Mortgage affordability has actually improved in recent years despite surging home prices
  • Existing homeowners typically spent 17.5% of household income on their monthly housing payments in September, down from 19.6% two years ago
  • Low mortgage rates are improving affordability, but rising down payments are hurting prospective buyers
  • Property values have grown at 2X rate of incomes over the past six years, and typical U.S. home now worth 3.08 times median homeowner household income

It’s great that existing homeowners are enjoying record low mortgage rates and equally affordable housing payments, but what about prospective home buyers?

Well, housing affordability has actually improved since 2018 due to the ultra-low mortgage rates available, per a new analysis from Zillow.

This is despite the fact that home values have grown at about double the rate of incomes over the past six years.

While households typically spent just 17.5% of income on monthly housing payments in September, down from 19.6% two years earlier, the typical U.S. property is now worth 3.08 times median homeowner household income, an all-time high per Zillow.

In other words, monthly payments are cheap for existing homeowners, but their properties are valued well above their incomes.

They remain affordable because many of these homeowners have small mortgage balances and super low mortgage rates.

But if these same folks were to buy their homes today, it might not work out, which brings us to those prospective buyers, or Gen Z home buyers.

Zillow noted that home values have increased a whopping 38.3% since September 2014, while homeowner incomes have gone up just 18.8% over the same period.

If a home buyer puts down 20% on a median-priced property they would have only needed about $36,600 at the start of 2014, or 6.4 months of income for a median homeowner household.

Today, they’d need a $52,000 down payment, which is 7.5 months of income for that 20% down payment to avoid PMI and obtain a more favorable interest rate.

Even worse for those still renting, Zillow expects home prices to rise a further 7% over the next year, which would increase that required down payment another $3,600 to about $55,600.

This is essentially going to steer more new home buyers into low down payment mortgages, such as FHA loans that only require 3.5% down, or Fannie Mae HomeReady and its mere 3% down requirement.

While it at least gives them an option, they’re going to have higher mortgage payments as a result, due to a larger loan amount, higher mortgage rate, and compulsory mortgage insurance.

Additionally, they’ll have very little skin in the game, which could present a problem if home prices take a turn for the worse, as they did a decade ago.

The good news is the bulk of homeowners are sitting pretty on mounds of equity, so assuming cash out refis don’t become the next big thing, the overall housing market should be relatively safe.

Could Existing Homeowners Afford to Buy Their Properties at Today’s Prices?

One last thing. We’ve basically got this weird situation where a lot of existing homeowners probably wouldn’t be able to afford their same properties if they were to purchase them today.

However, they’ve got a ton of home equity that is only growing each month thanks to regular payments of principal and rising home prices, meaning more money is essentially locked in their properties.

At the same time, it makes a move difficult because even a lateral purchase would be pricey from an affordability standpoint when you factor in stagnant incomes and higher property taxes.

Or the fact that some of these owners are retired or not making peak income.

In the end, it further exacerbates an already difficult situation in terms of housing inventory, which has been on the record low end of things for quite a while.

That just points to even higher home prices and lots of equity accrual, which buffers the housing market, but makes it increasingly difficult for new homeowners to get into the game.