Understanding the Housing Bill-Part 1

We've been hearing about Capitol Hill's plans to rescue the mortgage crises through the "Housing Relief Bill" for some time. After passing the House last week the outlook is strong that the Bill will be soon become the law of the land. And whether your a home owner or a home buyer it's got something in it for you...like it or not.



First if you already own a home here's what the Housing Bill means to you.

ARM Relief
If you're adjustable rate mortgage shot up to an unaffordable new rate and you can't refinance into fixed-rate loans because your home has lost value, and you owe more than your house is worth the soon-to-be law may help you. Here's the scenario:

You bought a house (before Jan. 1, 2008) for say $125,000 (it's just an example, I know it's rare to find a house that cheap). You took an ARM for $110,000 after making a $15,000 down payment. But the house lost value. Now it's worth $100,000, based on an appraisal. Meanwhile, the ARM's rate went up and you can't afford the loan payment.

Under the new law, the lender would forgive everything you owe above 90% of the home's current appraised value--or in this example $90,000. The lender would not be allowed to seek any of that $15,000 later.

That allows you to find another lender who would underwrite a $90,000 mortgage to be insured by the FHA. That loan amount would include the upfront FHA insurance premium of roughly $2,700. However....If you sell the house (or refinance the loan) the FHA gets a cut.

The equity-sharing arrangement goes like this: If you refinance or sell less than a year after getting the FHA loan, the government gets 100 percent of the home price appreciation. So if you sell that house in the example above for $120,000 the FHA would take a cut of the extra $20,000. If it's more than a year but less than two years, the FHA gets a 90 percent cut. The FHA's cut decreases by 10 percent until the five-year mark. Anytime after that, the FHA gets half of the appreciation, no matter how long you have the loan or own the house.

The idea is to encourage homeowners to keep their FHA-insured mortgages for at least five years, but to refinance before home prices zoom upward again.

Property tax deductions
Currently you can deduct your property taxes from federal income tax if you itemize deductions on Schedule A. But if you don't have enough deductions to file Schedule A then you take the standard deduction without the property tax deduction. The proposed law does away with the need to meet Schedule A requirements and sets a standard deduction. It looks like this:

For homeowners who pay property taxes, the standard deduction is increased by $500 for single filers and $1,000 for couples filing jointly. But, you can't increase the standard deduction by more than your the property-tax bill. So if you're married filing jointly and you pay $800 in property taxes, you get an $800 deduction, not a $1,000 deduction.

More on the Housing Relief Bill and what this means for new buyers tomorrow....