29 October 2009 –GET YOUR CHECKBOOKS OUT…….
Bad news and not so bad news for Cook County and Chicago residents. The new tax bills will be arriving shortly and some residents may want to be sitting down when they open their mail. Most Cook County residents will be looking at a median increase of 10 percent, and in some areas, 20 percent. The better of the bad news is that the median increase in Chicago is estimated at 3 percent. For instance, Lincoln Park is looking at a measly 3 percent and Lakeview is even lower at a 2.1 percent increase. However, not all neighborhoods will fare so well. According to the Cook County Assessor’s office, the median increase in many of the other 77 neighborhoods will shoot significantly higher. Many of the lower income areas will see the highest percentage increase along with more middle-class communities near O’Hare airport.

10 August 2009 ? The impact of the conditions of the local real estate market is one of the a largest factors to the growing budget deficit of the City of Chicago. With a projected shortfall for the overall budget in 2009 to exceed $300 million dollars, the mayor?s office is predicting a greater number for 2010. According to the City of Chicago, property sales contributed  approximately $250 million to the city?s revenue via  the transfer tax at the height of the market in 2006. This tax totaling $10.50 per  $1,000 of purchase price($7.50 by the buyer, $3.00 by the seller) paid at the closing of each real estate transaction is estimated to bring in only $55 million in 2009. The city is only budgeting $53 million for 2010. The concerns all  Chicago Realtors®, residences and business should have is where the city will be looking to make up this shortfall.

First-time buyers have been driving the market in Chicago for months. They are taking advantage of both the low prices and the nearly record breaking interest rates available to them. First-time buyers are also helping the market by buying homes from sellers wanting to also take advantage of the market by buying something larger. In my experience, this is typically the beginning of a larger market improvement.

For Most the Tax Credit is a Bonus, Not Reason to Buy

The Chicago Skyline Viewed from Buckingham Fountain

The $8,000 first-time buyer tax credit has been a nice bonus for many of these buyers. I haven’t seen evidence that the tax credit was the driving force for first-time buyers in Chicago; they look at it more like an added bonus to the already low prices and interest rates. It has helped push a few on the edge of the decision to buy or rent to move toward buying, but overall it has not been a tremendous influence on people’s decision to buy.

The number of first-time buyers has been strong over the last three months. Multiple offers (have not said that in a while!) have been taking place on well-priced homes that appeal to first-time buyers. The trend looks like it will continue, especially with many flexible first-time buyers taking advantage of short-sale opportunities.

The deadline for the first-time buyers tax credit is fast-approaching: you must close by November 30 and most closings are now taking much longer?perhaps averaging 60 days. Because of this timer constraint, I expect some will act a little more quickly now. However, it will most likely not have a large impact either way.

Nice If Extended, but Not Necessary

It will, of course, be better if it is extended but should not have a tremendous effect if it is not. The tremendous supply of places for sale in the Chicago area, aggressive pricing by some sellers, and low interest rates will be much more important. But, hey, throwing money at somebody will never hurt.

We’d like to thank Albany Tim for sharing today’s photo via the Creative Commons License.

27 July 2009 ? With only 127 days left for first time home buyers to take advantage of the $8000 tax credit, speculation is heating up on whether it has been effective with much doubt it will be renewed. Because of longer times for processing mortgages, buyers must be under contract in the next 60 days in order to take advantage of the credit. The transaction must be closed no later than November 30th, 2009, for the home buyer to receive the credit. Has it accomplished it?s goal? Dave Hanna, President of the Chicago Association of Realtors® says, ?There are a lot of people in the middle now and that’s where we want to see the change. They want to move, but need someone to purchase their home. The tax credit was aimed at creating this movement, but it’s still a wait-and-see to assess how it has delivered.” In a recent address to regional Realtor® leadership, the foremost real estate economist in the United States, John Tuccillo, prediction is the tax credit will not be renewed.

Are Additional Tax Breaks Better Than a Sunrise Over Lake Michigan?

Is your income less than $72,384? Is your household income less than $105,560? If your answers are yes, you may be missing out on a little known program offered by the City of Chicago?s Department of Community Development.

I recently met with a client who has an income of $55,000 per year. The client is single and is looking to purchase for the first time in the City of Chicago. During our application I pointed out the City of Chicago?s TaxSmart Program, which is a Mortgage Credit Certificate (MCC) program. The program has been put into place to give tax savings to a first-time buyer (defined as someone who has not owned a home in the past 3 years) or to a buyer of a home in a targeted area. If purchasing in a targeted area, it doesn?t matter if you are a first time buyer or if you are a recent homeowner. The home buyer can apply for the MCC in conjunction with a TaxSmart mortgage loan from a participating lender.

TaxSmart Equals an Additional Tax Credit of 20%

The benefit of this program is an additional tax credit of 20% of the mortgage interest that can be taken annually. This credit can be taken annually as long as the home remains the primary residence of the buyer.

Example: Single Person & Does Not Own a Home*

For a single person making $55,000 a year, it is assumed they would pay taxes in the amount of 20% (effective tax rate/bracket). So this would be $11,000 in federal taxes paid. By owning a home, mortgage interest and real estate taxes are deductible on your income tax. For this example we are going to assume mortgage interest write off is $10,800 and real estate taxes are $3,000.

$55,000 (income) – $10,800 (mortgage interest) – $3,000 (real estate taxes) = $41,200 taxable income.
$41,200 is the taxable income at 20% (effective tax rate/bracket). So this would be $8,240 federal taxes paid.

If you did not own a home you would have paid $11,000 in federal taxes, now when you own a home your federal taxes are $8,240 which is a $2,760 tax advantage. For this client, she typically would get a tax refund of $800.00 per year when she was not a homeowner, now she will receive $800 plus the $2,760 for being a homeowner.

TaxSmart Means An Additional $1,719 Refund For This Example

In addition to this standard tax benefit of $2,760, my client will also get back $1,719 on her tax refund because her income falls under the limit for the TaxSmart program. The 20% additional tax break can be taken each year that the home buyer hold the mortgage loan and uses the home as their primary residence.

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Consult your mortgage professional for more details and specific information regarding this program.

*Consult your tax professional, certified public accountant or tax preparer

Blue skies on The Bean in Chicago

Don’t count on your property taxes dropping as a result of reduced market values. 2009 is a reassessment year for the City of Chicago. The Sun Times recently reported that homeowners in portions of Rogers Park received notice that the assessed value of their property has decreased up to 6.1%. While that news may seem very positive on the surface, assessed value is not the only factor used in determining property taxes. Two other factors, including the tax rate and equalization factor, along with a multitude of government agencies, all have an impact on your final tax bill.

Reduced Market Value Doesn’t Mean Reduced Property Taxes

In addition, assessed value and market value have very little in common beyond the property address. While market values have decreased as much as 20% in some areas since the last assessment in 2006, however don’t expect your assessed value to decrease accordingly. County sources state that Chicago has not seen a decrease in assessed value in recent history, and that the decreased assessed values are difficult to award if the market value is expected to rebound before the next assessment year in 2012.

So, the bottom line is this – pay your taxes, contest them when possible, and use every city service available to you to the fullest extent!

2 July 2009 – First ward alderman Manny Flores has proposed an ordinance to cap the city’s liability for the 2016 Summer Olympics here in Chicago at $500 million. This proposal was in response to Mayor Daley’s meeting with the Olympic Committee in Switzerland on June 17. In that meeting Mayor Daley said as host city of the Summer Olympics, he would sign a contract that Chicago would be burdened with all loses incurred. As of today, ten other city alderman have signed on to the Flores proposal and will act as co-sponsors. Many people are concerned that if Daley were to sign such an agreement and there were cost overruns, the likely source to make up the difference would be real estate taxes in the City of Chicago.

25 June 2009 ? Mortgage backed bonds opened up 19 this morning and continued to trend up to a positive 41! Mortgage Bonds may be rallying as the unemployment continues to rise with 15,000 more jobs lost than forecasted. Yesterday?s announcement by the FED that they will keep the Prime Rate close to zero (0) for the entire year and also continue to buy mortgage backed bonds came as no surprise. The government continues to buy mortgage backed bonds to help keep the mortgage rates at a consistent low level to attract first time buyers with low home prices and low mortgage rates. If you are considering buying and you currently own, meet with a seasoned mortgage consultant who can explain the rent versus own benefits. Right now many renters would be surprised that they can actually have the same payment if they buy a home as what they are paying rent! Mortgage interest and real estate taxes are deductible and if you are purchasing in Chicago there are other incentives.

The 30-year rate continues to trend down and is currently at 5.125%. Today?s tip of the day if you are going to take a 30-year mortgage with an average loan amount of $200,000 and you apply $95.00 extra per month to your mortgage payment this will save $40,000 of interest over the life of the loan and your mortgage will be paid off in 25 years!

There are two things I?d like to cover: Why should I refinance? And, what is the process for refinancing? I think there are some misconceptions and confusion about these, and I?d like to help clear these up, or maybe just give you a better understanding.

Why should I refinance?

Hmmm...a bit much.

The obvious answer is that it will save you money. But it?s more than just your monthly payment going down. You might say, ?But Brad, I have no problem making my payments right now, why should I bother?? If I know you well enough, I might reply ?Hey, if a couple hundred dollars a month really doesn?t matter to you, just write out a check to me for $200 the first of every month, and I?ll come by and pick it up.? That sometimes gets me a laugh. So, let?s take an example. Let?s say you have a $250,000 mortgage, and your current interest rate is 6.5%. Late summer 2008, 6.5% wasn?t too bad. And for those of you too young to remember, in the late 90s, 8% was doing good, and when Carter was in office, mortgage rates were in the teens. So the P&I (principle and interest-payment for the mortgage only, not including taxes and insurance) would be $1,580 per month in this scenario. Now, let?s say we do 5% on this particular loan. For now, I am going to leave out closing costs and other expenses?we?ll get to those below. So $250,000 at 5% is $1,342 a month. That?s over $200 a month, and nothing to sneeze at.

But, let?s elaborate on this a little further. It?s not just a couple hundred of bucks a month. You are also chipping away at the principle faster. How much interest would it be on $250,000 at 6.5%? $250,000 x .065 = $16,250 in interest per year. Now, take $250,000 x .05. That?s only $12,500 in interest per year. If you take 12 payments at the higher rate ($1,580 x 12), that?s $18,960 per year, and at the lower rate ($1,342 x 12) it?s $16,104 per year. So, you?ve save almost $3,000 a year. But, if you subtract the interest from the payments, you can see how much more the principle would go down. At 6.5%, you?d take $18,960 (total payments) – $16,250 (interest paid) = $2,710 toward principle. Now take the 5% loan – $16,104 ? $12,500 = $3,604 applied toward principle. See that? Not only did you save a couple hundred dollars a month, but you paid 30% more toward the principle than you would?ve if you’d kept your old loan. And long term? 360 payments (30 years) times $1580 per month comes out to $568,800 (!) over the life of the loan. $1342 x 360 = $483,120. Not worth it? OK, I?ll stop by your place in 30 years and pick up my check for $85,000.

What else can refinancing do for me?

All right, so you are 40-something, and don?t want to start over with a new 30-year loan. ?Brad, I?ve already got 5 years into my current mortgage. I?d hate to go backwards that much, and I don?t have a problem making my payments where they are at.? Sure, that makes sense. Let?s do a 20 year mortgage. And, let?s make the rate 4.875%, since 15 or 20 year loans usually have a slightly lower rate. $250,000 at 4.875% on a 20-year note is $1,632 per month. So, now, you?ve kept the payments close to the same, but shaved five years off your term. And you?d save a whopping $177,000 over the life of the loan ($391,600 vs. $568,800). Don?t even get me started on what your money could do for you if you took the difference and invested it. And you can do the same thing with a 30-year mortgage. Let?s say you like the lifetime savings, but the payment scares you a bit. That?s $300 a month, you know. If you send in just one extra payment per year, you pay off your loan in about 24 years. So in our above example, send in $1,400 each year from your tax return, or send in $1,476 per month ($1,342+$134), which is still less than the $1,580 per month you were spending, and you save huge over the life of the loan. 24 years times 12 months is 288 months. At $1,476 per month, that?s $425,000 over the life of the loan, which saves you almost $60,000.

So why is my loan amount going up so much?

OK, Brad, you?ve convinced me that it?s worth it to refinance; what comes next? Let?s start off with the nuts and bolts.

Take Interest Into Account

Pay Less Green For Your House?

Your mortgage payoff is always going to be higher than your principle balance. Mortgage interest accrues daily, and is paid in arrears. When you made your April payment, it paid all of the interest that accrued from March 1- March 31, and your March 1 payment paid the interest from February 1 ? February 28, and so on. So, let?s say you started the refinancing process now, and plan on closing within the first half of May. If your mortgage statement says $249, 345, how much will your payoff be? So you?ve made the April payment, but since we?re closing early May, you can skip your May payment. Let?s say we close May 10, and the loan funds on May 15 (3 day rescission for refinances). We have daily interest then that will accrue from April 1 through May 15, a full month and a half. $250,000 (your original loan amount) x .065 (6.5% interest) = $18,960 of interest in a year, divide by 365 (sometimes 360 is used for this), and we have $51.95 per diem interest. Multiply that by 45 days, and we have $2,337.50 interest to be accounted for. $249,345 + $2,337.50 = a payoff of $251,682, and that?s if there is no escrow shortage or accrued late fees. Plus the title company usually pads the payoff by a couple of days, which you?d get refunded in a couple weeks.

Closing Costs & Fees Happen

Now, we have to add in closing costs. These can vary widely, and depending on the situation and the rate, there may be points involved. But not counting points, you can figure a couple thousand dollar for closing costs. There is always going to be title fees, processing and/or underwriting, maybe some miscellaneous ?junk? fees, county recording fees, etc. Let?s not forget about the per diem interest on the new loan. If we have 15 days of interest (the loan is funding the 15th of May, and your first payment isn?t due until July 1, and interest is paid in arrears), and round to $50 a day, that?s another $750. And you want (or are required to have) escrows for the tax and insurance? Let?s say your taxes are $6,000 per year. That?s $500 per month. Let?s say your insurance is $900 a year, or $75 per month. In Cook County, taxes are due in March and October. (Most of the surrounding counties are June and September.) So, our loan funds in May, and your first payment is July. You make three payments (July, August, September) before your taxes are due. $3,000 is due, but you?ve only paid in $1,500. That means we need to set aside at least $1500 for ?reserves? into the escrow account. And almost always, they add another 2 months ?pad? in case the taxes go up, which does happen inevitably. So let?s make that $4,000 for tax reserves into escrow.

Don’t Forget Homeowner’s Insurance

Let?s say your homeowner?s insurance is also due October 1. Using the same formula as we did for taxes, $900 will be due, but you?ve only paid in $225 with your three payments. So that?s $675 needed in reserves, plus 2 months? pad, for $825 into escrow reserves for insurance. I?d like to mention here that you will likely be getting a refund from your current mortgage company for the monies in your current escrow, if you have one, and they would be close to what we are setting aside in reserves. So if you want to keep your new loan amount down, you could bring in $4800, and you?d be getting a check back for around that amount in 2 to 4 weeks after your current mortgage is paid off.

Bring It All Together

So, the question will pop into your mind ?Why is my mortgage going from $250k up to $260,000???? And the answer is this (rounding for easy math): $252,000 payoff to the current mortgage, plus $2,000 for closing costs, plus $1,000 for per diem interest, plus $5,000 into the escrow account, brings the loan to about $260k. And if it?s an FHA loan, you have 1.5% up-front Mortgage Insurance Premium (MIP), which goes to HUD. In this case that would be $3,900, bringing your loan up to almost $264,000. So that?s how your loan amount can go up ten grand with only a couple thousand in closing costs. But, you have almost as much in increased short term cash flow. Skip two payments (May and June), and that?s over $4k here (including taxes an insurance), and you?re getting almost $5k back from your old escrows. If you want to keep your loan amount down, you could come to the closing with that $9k, and you would not get the benefit of increased short term cash flow, but you wouldn?t have your loan amount going up so much, if that?s a concern. It?s your house, and your mortgage. You decide which way to go.

Oh, Those Underwriters?

Now, obviously I don?t want to scare anybody off from purchasing a home or refinancing; that?s how I make my living. But, I do want to set the right expectations. These days, investors (like Wall St., who buy the loans in bulk from the lenders), are a little skittish about investing in mortgages. So, every lender, every underwriter, and every appraisal reviewer out there wants to make sure they have done their due diligence. They want to make certain that nothing snuck past them on their watch. So it is possible, dare I say probable, that we will be required to produce additional documentation or support above and beyond what would ?normally? be required. Maybe they ask for tax returns or a written verification of employment in addition to 2 pay stubs and 2 W-2s. Maybe they ask for additional sales on the appraisal. Maybe they ask for something that doesn?t seem to make sense to you or me. But, there is likely some sort of reasoning behind it. And the bottom line is that they control the purse strings, and they can ask for whatever they want. They are trying to minimize their risk, and you and I simply have to deal with it. The loan might take a little longer to close. You might have to send a couple extra faxes. But, as long as you know this up front, it?s really not the end of the world. It might be a little more hassle, or a little more time, but 99% of the time, if I tell you I can get your loan done, then it gets done.

We’d like to thank Colin and WoodleyWonderWorks for today’s photo that he so kindly shared via the Creative Common’s License.

Lake Shore Drive Is Home to Many of Chicago's Co-ops

There aren’t many co-ops in Chicago, but occasionally one comes up in an MLS search and my buyers always ask about them. I know of several along Lake Shore Dr and in Hyde Park, one in Ravenswood, and a few in Rogers Park.

Until the most recent condo boom, co-ops were the most prevalent form of ownership in Manhattan, but now the condo buildings have taken over a large part of the New York real estate market. The history of co-ops in New York was well documented in Michael Gross’ book 740 Park: The Story of the World’s Richest Apartment Building.

Why Do Buildings Set Up as a Co-op?

Each co-op building has its own individual history, but many were originally apartment buildings. At some point when a landlord wanted to sell a building, the tenants would buy the building as a cooperative group (and often at a discounted price) in order to avoid being forced out by a new owner who may raise the rent, convert to condominiums, or tear down the structure.

Another reason why co-ops were formed was in order to have more control over who your neighbors are. At one time, co-op boards used their power to reject prospective owners based on race or social status. Today, co-op boards can reject a prospective owner as long as they do not discriminate based on age, sex, race, or marital status.

In a Co-op You Own Stock

Co-op’s are a different form of ownership than condos in several ways. Condo owners own their individual unit and have a percentage share of ownership in the building’s common areas based on the size of their unit. When you buy in a co-op, you are buying shares of stock of a corporation that owns the entire building. The number of shares you own is based on the size of your unit. When you own a condo, you pay taxes on your individual unit. A co-op has one tax bill for the entire building that is paid as a group and is typically included in your monthly assessments.

Co-ops Have Different Rules

Every communal living has rules and regulations. Many condominium buildings and cooperative buildings have similar rules. However, it’s not uncommon for a co-op to have more rules than a condo. A buyer with an accepted offer will need to meet with the co-op board before they close, and the board has a right to refuse to sell them stock in the company that owns the building. Another rule that makes co-ops unique is that they are typically 100% owner occupied. That means that if your situation changes, you can’t rent your home out.
Co-ops generally have a lower purchase price and much higher assessments. The assessments include much more (for example, taxes, etc). Many co-ops require a higher down payment than condominium loans because you are receiving a different type of loan that only certain banks can provide. Many co-op boards require a higher down payment than what the bank requires because they want to ensure that their owners are financially capable of this purchase.

Co-ops can often be found at a good price, and with that good price comes community. There is pride in co-op owners, and many residents occupy their units for longer than the average condo owner.

Whether you are buying a condo or a co-op, be sure to learn the specific rules and regulations for the building you are interested in.

We would like to thank John Beagle for kindly sharing today’s photo via the Creative Common’s License.