1. Types of Financing Taxes and Assessments

2. Nightly Trivia Q) What famous celebrity’s home sold after just one day on the market? A) George Burns’ Beverly Hills mansion sold for $2 million soon after his deal and after only one day on the market.

3. Types of Financing Types of mortgages Other types of financing

4. Adjustable Rate Mortgages Variable rate mortgage – interest is adjustable in both directions over the life of the loan Adjustable rate mortgage – tied to a publicly available index Initial rates are lower than fixed- rate mortgages

5. Adjustable Rate, cont. Payments rise in times of inflation Interest is tied to an index, most popular is the 1-year constant maturity treasury Margin is added to the index rate, usually 2%-3% Adjustment period – time between interest rate adjustments

6. Still More on Adjustable Rates Interest rate cap – ceiling on how far the interest can be raised Payment cap – ceiling on how much the monthly payment can rise Negative amortization – During rising interest rates, payments may not keep up with payments due

7. Disclosure Based on Regulation Z Loans secured by a home for 12 months or less are exempt Must provide: Historical example of changes in index values Initial and maximum interest rates Must provide: Educational brochure about ARM’s Must be provided early – with application or before nonrefundable deposit Maximum interest rate

8. Choosing an ARM Worst-case scenario – what happens to the payments if interest rises at the maximum rate up to the cap? Teaser rate – a very low intro rate followed by large increases – BEWARE!

9. Graduated Payment Mortgage Increased payments based on salary expectations Much more popular during times of inflation and high interest rates

10. Equity Sharing The lender gains rights to share in profitable activities of the property in exchange for a loan and good rates Shared appreciation mortgage – low rates for the life of the loan with a balloon payment for property appreciation at loan maturity

11. Rich Uncle? An investor pays the down payment, mortgage payments, and property taxes The buyer pays rent to the investor The investor can claim tax deductions for the depreciation of the property

12. More Mortgages Package mortgage – includes personal property Blanket mortgage – secured by two or more properties Construction (interim) loan – money advances with contruction Reverse mortgage: Payment to the homeowner in a lump sum Monthly payments to the homeowner as an annuity Blended-rate loan – higher principal for lower rates, larger total return

13. Final Kind of Mortgage Equity mortgage – cash advanced based on the equity in a borrower’s home Traditionally tops out at 70% - 80% of the home’s value

14. Making Loans Affordable Affordable housing loans help first- time, low-, and moderate-income borrowers Freddie Mac, Fannie Mae, and HUD all offer their own affordable housing loan programs

15. Affordable Loan Components Alternative credit criteria for low- income borrowers Consumer education – prepurchase home buyer education course 97% conventional loan – a traditional loan made on only a 3% down payment

16. Asset Integrated Mortgage Creates savings from the down payment – for borrowers expecting to put down 15%-20% Down payment of 5% is made with the balance invested in a fixed annuity held by the lender as collateral The profit on the annuity reduces the total cost of the loan to the borrower

17. Seller Financing The buyer substitutes a promissory note for cash Popular for land sales, mortgage assumptions, and for spreading out payment to the seller May not be readily convertible to cash without a balloon clause

18. Other Financing Techniques Wraparound Mortgage - existing mortgages remain and are included with the wraparound Subordination – Paying a second mortgage holder part up front with the balance plus interest at completion Contract for deed – the seller finances the buyer like a traditional mortgage, but the title remains with the seller

19. More Financing Options as financing – a developer can buy one portion of land plus options for others to see what direction the investment takes Lease with option to buy Over encumbered property – individuals are not regulated, debt can surpass property value if not carefully managed

20. Mortgages as Investments Loan pools from Fannie Mae, etc. Junior mortgages If a borrower is offering a premium there is a reason! Always have a title search done before purchasing a mortgage

21. Rent and Lease Leases are a means of financing property Sale and Leaseback – an owner- occupant sells the property and remains as a tenant Step-up rentals – a schedule of increasing payments for a lease

22. Taxes and Assessments Property taxes Income taxes Conveyance taxes

23. Property Tax Basics Assessed by governments to fund public projects and services Largest single source of income for this purpose Ad velorum taxes – the more valuable the property, the higher the tax

24. The Tax Process Appropriation Each taxing body prepares its budget Other taxes and revenues are subtracted The balance comes from property taxes All properties are appraised The appraisal leads to assessed value Taxes are calculated as a mill rate, dollars per hundred, or dollars per thousand The taxes are applied to the respective properties Unpaid property taxes result in foreclosure and follow the property

25. Unpaid Property Taxes Foreclosures are sold at an open auction The highest bidder receives a tax deed or tax certificate, depending on the state If the sale procedure is faulty, the deed can be successfully challenged in court

26. I Don’t Want to Pay my Taxes! Assessed values of property are recorded on assessment rolls If someone believes their property was over-assessed, they can file with the assessment appeal board Sometimes, a board of equalization balances differences in tax policy between counties

27. Getting Out of It Churches, charity groups, etc. are exempt from property taxes on property used for these purposes Many companies are given tax breaks in return for their moving to an area

28. Variations Property taxes can be adjusted to reflect changes in the property’s value This used to be done approximately every 10 years Computers allow for it to be done annually

29. Special Assessments Used to finance geographically limited improvements to an area The area is an improvement or assessment district A public improvement benefits the entire community Citizens may join to form an improvement district

30. Funding Assessments Once an improvement district is formed the project is confirmed and must be funded Funding may be accomplished through a bond issue if the cost per landowner is greater than $100 Assessment for some utility projects may be on a front-foot basis

31. Income Taxes Basis – the price originally paid for a home or its cost of construction Amount realized – net income from the sale Gain on sale – difference between the basis and amount realized

32. Sale Reporting The IRS requires these parties to report transactions: Person responsible for the closing Mortgage lender Seller’s broker Buyer’s broker Any person designated by the IRS

33. Saving on Taxes Taxpayers can exclude $250K if single and $500K if married on the sale of a principal residence Notification of home sales less than this amount are no longer made to the IRS

34. $500,000 Requirements Either spouse meets the ownership test Both spouses meet the use test The taxpayer has resided there for two of the last five years Neither spouse is ineligible for exclusion by virtue of sale or exchange of residence within the last two years

35. Other Ways to Save Installment method – using a promissory note interest earned is reported and taxed separately as interest income Property tax and interest are tax deductible on federal income taxes

36. The Last Tax Conveyance taxes may be charged at the exchange of title Fees are paid to the county recorder prior to recording and are in addition to the charge for recording the document itself