Discussion:Is this the wave of the future?

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Discussion Forum Index --> Tax Questions --> Is this the wave of the future?


Jokadah (talk|edits) said:

19 February 2007
I have never seen this before and am wondering if this is the backlash of the ARM and interest only home loans. I have MFJ clients whose AGI is $184K. They refinanced their ARM for a fixed rate on $1.6 Million dollar house (yup I'm in California). Their old loan was interest only to the tune of $6,900+ a month. When they refinanced they were also hit with a $33K prepayment penalty which was included in the 1098! (To put in bluntly, they got hosed on the refinance and I'm not sure the ends justified the means but thats another story.) Here is the quandry . . . the 1098 on the 1st was $116,255, the 2nd was $18,954 and new loan was $9,686. Their total itemized deductions are $183,691 and this totally zeros out any tax liability. Have any of you ever experienced this before and if so how did you handle it?

Death&Taxes (talk|edits) said:

19 February 2007
You did not tell us the principal: 1.1 is the limit, not that it matters with numbers like that. "I'm running as fast as I can."

Jokadah (talk|edits) said:

19 February 2007
The principal is $1,250,000. and am aware of the $1 million limit for mortgage interest. Even with factoring in the qualified loan limit, their tax liability is under $4K. I wonder how many people that refinance the interest only loans will end up with a stiff prepayment penalty. I have a couple of young clients that against my advice purchased homes with zero down, interest only for the first five years and are trying to refinance. Because they have been paying interest only and property has gone down a little in CA they are upside down and have no equity in their house. Lenders are not as eager to lend as they were a couple of years ago and are not going to lend for more then the property is worth. Everyday the papers have several foreclosures. Just was curious if anyone else has seen these big prepayment penalties.

Death&Taxes (talk|edits) said:

19 February 2007
I suspect this is a West Coast norm; at least your clients are facing up to their stupdiity. When the New England market crashed around 1990 a client lost his job and walked away from his 300K house that was now worth less than 200K, filed Chapter Seven, and let the bank take the hit on the repo. He is now a successful businessman in another part of the country. In fact two years after the filing he was making mid-six figures. Go figure.....what is worse, he complains about people on welfare.

PVVCPA (talk|edits) said:

February 19, 2007
I am in CA, too. And I know I am going to see some of those same things this year. For the last 3 years, lenders have been handing out those negative amtz loans with stiff prepay penalties. Don't worry Mr & Mrs Homebuyer, when your home appreciates (because real estate always appreciates), then you can get out of this really sucky loan and get a good one.

This was not my client, but a friend of my client. I suppose that their neg am loan switched to full interest. I don't have those numbers, but I guess they could not afford their "new" payment. So they refi'd out. They thought they had a $5K prepay penalty. I guess they did not hear the last zero. It was a $50K prepay penalty! What I can't figure out with this story is whether or not they had enough equity to absorb the $50k hit. Property values are down in the last 2 years, or at best flat.

The reality is that people were buying homes they could not afford with loans that were completely inappropriate. They will get to enjoy the dream of home ownership for a couple years, and then it's back to renting. No money in, no money out. My clients with apartment complexes are eagerly awaiting their return.

Bottom Line (talk|edits) said:

19 February 2007
Florida's "dirty little secret" has yet to hit the main stream media. Realtors, bankers, accountants, and attorneys know about the coming foreclosure boom but the newspapers haven't written the story yet. When the papers decide to write the story, all the politicians will get involved to "protect the people" from themselves. I've been preaching against these things for years but some people insist on doing it anyway. At least most of them now say "you were right".

Corptaxhelp (talk|edits) said:

February 19, 2007
Bottom Line: Newspapers (specifically, The Palm Beach Post, in my area) have been writing the foreclosure boom story for at least six months now. Realtors and others in the industry are flipping out and canceling subscriptions right and left. The Realtors are actually blaming the newspaper (check the letters to the editor just about daily) for the real estate bust. The industry folks say the only reason the market is in a downturn is because the newspaper keeps writing about how bad the situation is and how it is only going to get worse. Maybe your local newspaper is missing the story but mine isn't.

As an aside, I have bought two houses in the past eight years and both times I had to shop around to find a mortgage broker who would sell me a 30-year, fixed-rate mortgage. All the brokers were heavily selling adjustable and interest-only mortgages. One broker flat-out told me that he wouldn't write fixed-rate mortgages anymore, they were outdated and that if I didn't want an adjustable rate mortgage, I could go elsewhere. Is that the craziest thing you have ever heard? How many suckers took them up on such a deal?

Bottom Line (talk|edits) said:

19 February 2007
Hasn't really hit the Tampa papers yet. Of course the brokers were promoting the adjustable/interest only loans. That way they knew you'd have to come back when the rates increased. I think part of the problem is the real estate schools churning out too many realtors and brokers too. Now they're all scrambling for jobs.

Birdman (talk|edits) said:

19 February 2007
I'm in San Diego. I agree that the news does influence the prices, but in both directions. From 2000 to 2004 I remember reading constant news reports of double digit increases and forcasts that it will never stop, which I'm sure drove prices even higher.

Jokadah (talk|edits) said:

19 February 2007
California's over inflated real estate was/is crazy. In 2000, my parents sold their 900 square foot 3 bedroom, 1 bath house, 1 car garage "as is" for $425K. (Not a typo it was 900 square feet) They paid less then $20K for it in 1951. We did paint the inside and did a couple of little cosmetics fixes but it was "as is", no roof repair, no fence repair. We paid for the inspection up front so anyone interested would know what they were getting into, we literally had a bidding war. Today the houses in that area are selling for $725K+, is that crazy or what?

Natalie (talk|edits) said:

February 24, 2007
And how much land came with the house Jokadah? I'll bet it was a lot more than the lots being sold in Hawaii these days.

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