Tuesday, August 18, 2015

What Every Home Seller Needs to Know About Mortgages

If you’re planning to sell your home, you have several mortgage-related factors to consider — in addition to packing up and finding a great listing agent. Here are some of the most common mortgage-related questions among sellers.

Do I have a mortgage prepayment penalty?

A mortgage prepayment penalty is a fee banks charge for paying off your mortgage, and it can reduce your net cash significantly. You’re more likely to have this fee if your mortgage was put in place before the 2008 financial crisis, but mortgages obtained post-crisis can still have prepayment penalty fees if you pay off the mortgage within the first three years.

The most common prepayment penalty fee structure is six months interest on your outstanding balance. So if you have $275,000 left on your 4.25 percent mortgage, your prepayment penalty would be $5,483.75.

Your “note” will contain a provision explaining whether you have a prepayment penalty. However, often the note says you don’t have a prepayment penalty, but an addendum to the note says you do. So check your closing paperwork carefully.

How soon after I sell will my mortgage get paid off?

When your sale closes, the buyer’s funds will be used to pay off your mortgage loan. This payoff is handled by an escrow company or attorney depending on your state, and they’ll use buyer’s funds to pay off your mortgage within one to two days of closing, then send you a final closing statement (along with your net proceeds) to confirm payoff.

What are the tax implications when I sell my home?

If you sell a home you’ve lived in for two of the past five years, you’re exempt from paying taxes on capital gains up to $250,000 if you’re single and up to $500,000 if you’re married.

Your capital gain is your sale price minus selling costs and tax basis. Selling costs are real estate agent fees plus any staging or other closing costs from third parties like a title or escrow company. Tax basis is your purchase price plus improvements (renovating the kitchen, remodeling the bathroom, or adding a deck) minus any depreciation you’ve taken.

If you bought the home you live in for $250,000, spent $20,000 remodeling the kitchen, didn’t take any depreciation, sold it for $635,000 using an agent with a five-percent commission, and paid $1,800 in closing costs, your capital gain would be $331,450.

You’d pay tax on a capital gain of $81,450 if you were single — or no capital gains tax if you were married.

How do I calculate my net proceeds from my sale?

If you were a married couple in the example above, and had a loan balance of $125,000, the net proceeds calculation is sales price minus selling cost minus loan amount, netting you about $476,450.

If you were single, the calculation must also account for about 25 percent state and federal capital gains tax on the $81,450 gain, which is about $20,363. In this case, you’d net about $456,087.

When do I get pre-approved to buy a new home?

Once you’ve calculated your estimated net proceeds from selling your home, the next step is to get pre-approved for a new mortgage.

When getting pre-approved, provide your lender with your estimated net proceeds figures so they can target your down payment. If you haven’t talked to a tax advisor yet to estimate your net sale proceeds, a mortgage advisor can do rough calculations for you. Just remember, a licensed mortgage pro isn’t a licensed tax pro, so their estimates of your net proceeds will be unofficial.

What if I’m trying to buy a new home without selling first?

There are two ways to determine if you can buy without selling first.

The first (and most common) way is to qualify for the full financial obligations of both homes. If your income is enough to sustain this, you’re all set.

The second (and more rare) way is to work with a lender who might allow your primary residence debt to be excluded. If you can provide your lender with a signed listing agreement and a detailed comparable sales analysis from your real estate agent, you might be able to get the new loan without including the debt on the outgoing home. This option is usually only available in select hot markets, and your overall financial profile still must be very strong.

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