There’s something about old and/or rundown houses that can bring out the inner handyman in many people. But before you get caught up in DIY dreams of renovating and restoring an old house to its former glory or turning a huge profit on a foreclosure disaster, there are several things to consider. Use the following checklist to decide if buying a fixer-upper is the right choice before applying for a home loan.

1. How much will it cost? Don’t just factor in the purchase price and then name a dollar amount that you are willing to spend. You must do the math to actually determine the realistic costs that are going to be associated with the particular property you want to buy, not just the payments on a home mortgage. You’ll need to thoroughly evaluate the property and note all the repairs needed and what they are likely to cost in your area. If you hope to sell the home after fixing it up, it’s important to research current market values in the neighborhood.
2. You must get a home inspection. Do not even think of skipping this step. To get arrive at a realistic cost estimate, it is imperative to have a thorough home inspection. Hire someone who is reputable and knowledgeable about what it will take to update the home. When you make an offer for a house the contract should have a contingency for the inspection so that if major deficiencies are discovered you can get out of the contract or try to negotiate for a lower price if you still want the property.
3. Does the home need major structural improvements? Replacing plumbing, totally re-doing wiring, or fixing foundation issues can really drain your wallet. Are you willing to pay for these expenses and deal with any surprises that come up in the process?
4. Will you need to apply for a home equity loan to pay for all the repairs? While many homeowners assume they’ll be able to get home equity loans when they apply for them, the fact is that many lenders are turning down many applicants even if they have good credit. Make sure that you aren’t going to be stuck without the funds you need to spruce up a fixer-upper once you’ve committed to monthly mortgage payments.

It’s important to choose the right repairs and renovations if you are on a limited budget. If you plan to remain in the home for many years, you’ll have time to budget and save for any work that is needed as you go along.

Millions of Americans take a tax deduction for their mortgage interest payments each year. For many people the tax deduction is considered as a perk of being a homeowner, and for many people getting the tax break is viewed as a right. So what’s up with the government’s deficit reduction commission entertaining a proposal to change the mortgage interest deduction?

Trying to reduce the deficit

First, it’s important to understand why changes are being proposed. President Obama established the National Commission on Fiscal Responsibility and Reform to propose recommendations to cut excess spending and balance the nation’s budget. “We must stabilize then reduce the national debt, or we could spend $1 trillion a year in interest alone by 2020,” states the Commission in their draft proposal of Nov. 10, 2010.

Limiting mortgage interest

Proposed tax reform measures include limiting the mortgage interest deduction so that second homes and home equity loans would be excluded. Also, the mortgage deduction could have a cap of $500,000 instead of the current $1 million. Reaction to the proposed change in the deduction for mortgage interest has been met with concern and outrage.

Michael D. Berman, CMB, Chairman of the Mortgage Bankers Association, said in a statement:

Given the fragile state of the nation’s housing market, now is not the time to be scaling back incentives for homeownership. The mortgage interest deduction is one of the pillars of our national housing policy, and limiting its use will have negative repercussions for consumers and home values up and down the housing chain … We share the widespread concern over the growing national debt and want to help identify reasonable solutions, but we cannot support proposals that would chip away at the foundations of the real estate market.

A setback for the housing market?

Bob Jones, chairman of the National Association of Home Builders said in a statement:

Tampering with the deduction would be a major setback for today’s slowly emerging housing recovery. It would disrupt the plans of young households who are gathering their financial resources to purchase a home. And it would impose a substantial tax burden on existing home buyers, many of whom continue to stay current with their mortgage payments even as they struggle to make ends meet.

Arguing against the mortgage deduction

However, some tax experts say that the mortgage deduction should go. “What the subsidy is doing is driving up prices by encouraging well-off people to take out bigger loans, to buy bigger houses,” Roberton Williams, a fellow at the Tax Policy Center, told the New York Times. “So I think there’s a question about whether that is something the government should be doing with tax money.”

The deficit reduction commission is looking at many areas, not just mortgage interest deductions. If you feel strongly about any of the measures in the proposal, you can email comments and suggestions to the commission at commission@fc.eop.gov.

Home equity loans have a higher delinquency rate than all other types of consumer loans, according to data from the American Bankers Association. According to an article in the New York Times:

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

Home Equity Loans and Falling Property Values

Some homeowners who’ve fallen behind on home equity loans are likely to threaten bankruptcy if lenders try to collect. Also, because property values have dropped so much, many borrowers don’t see the point of trying to pay off home equity loans. Some homeowners are even willing to walk away from their homes and let them be foreclosed upon rather than pay off home equity loans and mortgages.

Settling Unpaid Debt

In some cases homeowners have arranged debt settlements for home equity loans. Before going this route keep the following things in mind:

• You must be behind on home equity loan payments before the lender will talk debt settlement
• In some cases your loan must already be in collections to work out a settlement
• Even if you settle a home equity loan, you may owe taxes to the Internal Revenue Service for the forgiven portion of debt
• Debt settlement is going to ding your credit score

Sell Your Property

It may make more sense to do whatever you can to sell your property and get rid of your home mortgage and home equity loan. Of course the housing market isn’t doing so great in many places, but you may be able to get your mortgage lender to agree to a short sale. A short sale occurs when the mortgage lender agrees let you sell for less than what you owe on your home loan. The holder of your home equity loan would have to agree to a short sale as well.

It’s possible that there is a home buyer out there who would be thrilled to get your house at a bargain price. In the long run it would be better to sell your home this way than to end up in foreclosure or bankruptcy, or spend more time stressing over all your unpaid loans.

When you apply for a home equity loan the lender requires that your home be used as collateral. This type of loan is considered a second mortgage.

Decline in Home Values

Some homeowners have had a difficult time qualifying for home equity loans during the credit crunch because of falling home values. But if you have good credit and a decent amount of equity, there is a chance you can get approved to borrow money.

It’s never a good idea to borrow money if you don’t need to. But if you are house rich and cash poor, a home equity loan can be useful if you need to make home improvements, pay college costs, or even consolidate high-interest debt.

When considering a home equity loan keep in mind the following pros and cons. Pros include:

• Home equity loans usually have much lower interest rates than credit cards and rates are often fixed.
• Interest paid on home equity loans is tax deductible.
• Depending upon how much equity you have you may qualify for a sizable amount of money.

Among the cons of getting a home equity loan are:

• If your property values declines significantly, you could end up owing more on your mortgages than your home is worth. This is commonly referred to as being upside down on a mortgage.
• Borrowing money by using your home as collateral is risky. If you can’t afford to keep making payments on a home equity loan, you could end up losing your property.

Access to a Line of Credit

Keep in mind that home equity loans differ from home equity lines of credit (HELOCs). A line of credit also allows you to tap into your home equity, but it is set up so you can draw on the money as you need it instead of taking a lump sum. Both home equity loans and HELOCs usually have shorter terms of repayment than first mortgage loans.

Tighter Lending Standards

Some people who were previously approved for HELOCs have had their lines of credit frozen because banks have tightened up on lending. In other cases people who have strong credit histories have been denied HELOCs because banks are reluctant to extend credit.

Shop around to compare home equity loans to find the best deals. Familiarize yourself with all the terms before signing up.

First-time homeowners sometimes make the mistake of not adding up all the costs of getting mortgage loans. Of course shopping for competitive mortgage rates is important, but keep in mind that your monthly payment includes real-estate taxes and homeowners insurance. Anytime you use a monthly payment calculator to figure out the cost of getting a home loan, it’s important  to include your best estimates for insurance and taxes.

Property Taxes

You can’t deduct your homeowners insurance premiums, but you can deduct real-estate taxes. Deductions can be taken for any state, local, or foreign taxes on real property. If your state or county imposes local benefit taxes related to property improvements such as sidewalks or streets, they cannot be deducted.

After you’ve owned a home for a while, you can file an appeal to try and get your property taxes lowered if you think you are paying too much. You must contact the local government to find out what the procedure is for appealing property taxes. Generally, you only have a certain window of time to appeal after receiving your annual assessment.

Mortage Interest

The interest paid on a home mortgage is also deductible. Interest on mortage loans can be deducted for your principal residence and for a vacation home. If you have a second home that is also rented out for part of the year, you must use the house for more than 14 days or more than 10% of the number of days during the year that the home is rented at fair value. If you have more than one property that you rent out, the mortgage interest deduction can only be taken on one of them.

Deductible interest must be paid on a mortgage for your first home, second mortgage, home equity loan, or home equity line of credit (HELOC). If you pay mortgage interest for someone else but are not legally liable for the loan, you cannot take a deduction for that amount.

Filing Your Taxes

When filing your income taxes on Form 1040 you have to decide whether you are going to take the standard deduction or itemize deductions on a Schedule A. The best rule of thumb is to itemize deductions if they add up to more than the standard deduction. But unless you choose to itemize you won’t be able to deduct interest from your home loan or real-estate taxes.

Nearly 2 million homes have been foreclosed upon this year, according to the Center for Responsible Lending. Although there are bargains to be found for folks who want to purchase a foreclosure, getting involved with such a deal isn’t for everyone. Here are some things to remember.

1. Get preapproved for a mortgage before you begin shopping around for a foreclosure. That’s because some mortgage lenders won’t underwrite home loans on foreclosed properties. But there are mortgage lenders who allow mortgage loans on foreclosures that are in good condition. If you are fortunate enough to already have a home equity loan, this could also be used to purchase a foreclosure as a vacation home or investment property.
2. Look for properties on real-estate sites that list properties that are in foreclosure, such as Foreclosure.com or RealtyTrac. You’ll pay a fee for using these sites, but will get a good idea of what type of homes are available in your area. You can also contact banks to see if they will give you a list of bank-owned homes for sale. A bank offering a property for sale may be willing to give you a home mortgage to purchase it.
3. Unless you are an experienced real-estate investor, avoid trying to purchase a foreclosure on your own. Find a realtor and attorney who have lots of experience with foreclosures. These people should understand local laws concerning foreclosures.
4. Avoid buying at auction if you are new to foreclosures. You usually won’t be allowed to inspect properties before they to to auction, so you’re taking a big chance purchasing a property this way. Auctioned properties also may have tax liens.
5. Expect to make repairs on a foreclosure. A lot of foreclosures are damaged by angry homeowners or fall into disrepair from sitting empty for a long time. Go into a foreclosure situation with as much information as you can get. Hire an inspector to give a full evaluation of any property you plan to buy.

Yes, there are people who are getting great bargains by purchasing foreclosed homes. But if you want to buy a home this way don’t let your emotions get in the way. It’s essential that you thoroughly research the different ways you can buy a foreclosure, as well as the process for obtaining a home loan for this purpose. You can search for a mortgage here to get an idea of what type of financing is available for a foreclosure purchase.

People with higher credit scores are more likely to strategically default on their mortgage loans, according to research by credit bureau Experian and consulting firm Oliver Wyman. After reviewing 24 million credit files, researchers found that homeowners who had high credit scores when they applied for a mortgage were 50% more likely to intentionally walk away from their homes and stop paying on mortgage loans than borrowers with lower scores.

Walking Away from Home Loans

As housing values have plummeted in some areas, an increasing number of homeowners have decided to bail on their mortgages, allowing their homes to go into foreclosure. That’s because many of these people are unwilling to continue paying on a home loan that exceeds the value of their property. In 2008, there were 588,000 strategic mortgage defaults, more than double the number in 2007. Read the rest of this entry »

You see these schemes all the time — promoted by financial planners, savings institutions, and yes, lenders. It can feel like if you aren’t on some plan to pay off your mortgage early you’re missing the boat or being financially irresponsible.

Some motives are plain. These people actually charge you to set up an “early repayment plan — in one case $3,500 for a line of credit and some software. So they naturally want you to believe that paying off your mortgage early is a good thing and that only they can help you accomplish this. Just tell these sales guys you’ll pass, thanks very much.

The next group of perhaps well-meaning “advisors” is simply very conservative with investing and the type of risk involved. But there is risk involved with every investment decision. Most economists will tell you that a company or a household is actually healthier financially when they are carrying a reasonable amount of debt and when the funds are used for investing in assets (like maybe a house? mutual funds? college?) that grow and pay off later. By putting everything into your home and leaving no extra for investing you have “all your eggs in one basket,” and as we have seen recently that’s not always safe or prudent. Keep in mind also that unless you have no other debt you are probably better off paying debt that doesn’t offer any tax advantages and carries higher interest rates.

The final group of those egging you on to pay off your loan early are lenders. They have two reasons for this. First, the more equity you accrue in your home the safer the loan is for the lender. Think a “cushion of equity” is going to protect you from foreclosure if you lose your job? NO, it makes it easier for the institution to recover its investment by foreclosing and therefore LESS likely that it will be willing to work things out with you. Safer for the bank, less safe for you.

Additionally, once you put your money into paying down your mortgage early–whether it’s making an extra payment each year, making payments every 2 weeks, paying a few extra dollars each month, or any other scheme–you no longer have instant access to that money. Guess what? If you need it, your bank will charge you to get your money back out of the home, in the form of fees for a home equity loan or line of credit.

So how do you accomplish the goal of paying off your mortgage early? Simply by taking whatever extra you are planning to throw at the principal balance but putting it into an investment account instead. There are planty of safe, conservative investment vehicles available for risk-averse or older homeowners. Younger ones can afford to go for higher risk / return strategies. Talk to an investment advisor about a plan that incorporates your goals and your comfort zone. With this plan, you have access to the extra funds without paying, your lender has less leverage should you experience financial difficulties, and when you are ready to pay off the whole shebang you can do it with the funds you have invested.