Consolidate debt help new york

If the 1990s were noted for irrational exuberance in the stock market, certainly the early 2000s will be remembered for hysteria in real estate. How hot is it? Sales of existing homes in the western United States rose 5.1% to a record-breaking annual rate of 1.66 million units changing hands in January 2003--3.1% stronger than January 2002--according to the National Association of Realtors (NAR). With it went the median existing-home price, which soared to $219,600--an amazing 10.4% spike from the same month a year earlier. In the Northeast the median existing home price was $175,000, up 14.9% from a year ago. With the stock market still in the doldrums, it's no wonder people are considering home buying a better bet. But is it?

Whether the exuberance in today's residential real estate market is rational or not, only time will tell. In the meantime, how should CPA/financial planners advise their clients in this volatile climate? Should clients buy houses and "flip" them like so many poker chips? Can houses be expected to yield returns like other investments? This article answers those questions and highlights some of the areas where CPAs can guide home buyers and sellers to a smooth transaction.

RECORD LOW INTEREST RATES

A home is a place to live, not an investment. Randi Grant, CPA/PFS, CFP, a partner with Berkowitz Dick Pollack & Brant in Miami, says, "Never look at your home as an investment or source of future income--only as a roof over your head." People can gain a false security watching their home values increase, reasons Grant, but they may have to use all of that gain to find comparable living space later.

With today's low interest rates, many current homeowners can't resist tapping into the equity they've built up in their homes to make improvements or fund other purchases. If clients want to realize the financial gains their homes represent--without moving--and take advantage of the historically low interest rates, Angelo Ciullo, CPA, a partner with Trien Rosenberg Rosenberg Weinberg Ciullo & Fazzari LLP in Morristown, New Jersey, and New York City, recommends refinancing. "Homeowners should lock in the lowest rates in 40 years," says Ciullo.

"Generally, we CPAs don't like debt," notes Bob Doyle, CPA/PFS, a partner in Spoor, Doyle & Associates in St. Petersburg, Florida. "Now that tax and interest rates are so low and itemized deductions are limited, the tax benefits of debt are not as attractive as they used to be." Despite the absence of these benefits, Doyle is having a hard time telling his clients not to borrow for 30 years at 5%. "Even though the client pays much more interest on a 30-year vs. a 15-year loan, with rates as low as we've seen in a generation, I feel compelled to support my client's borrowing plans."

However, there has been less argument for recommending adjustable rate mortgages (ARMs) in this market. Ciullo says the interest rate on an ARM is fixed for a short period, say three to five years. After that, the rate floats based on an established index, such as the one-year Treasury bill rate. "Mortgage bankers love ARMs," says Ciullo. "But adjustable rate loans are wise only in the short term," he says, since rates could start heading up. That possibility puts the borrower "constantly at risk" unless he or she refinances, with all the associated costs of doing so. Ciullo's bottom-line advice: An ARM is not a good choice unless you know you will occupy the home only for a short time.

Doyle agrees: "I don't think there's a lot more downside potential left in rates. The trend seems to be more toward the upside. So why use an ARM if you're going to be in the home for a long period of time?" Eventually, homeowners who don't pay off the debt quickly or sell their houses have to refinance to a fixed-rate loan--usually after rates have started to climb. At that point, what had seemed like a cheap, quick and cheerful way to grab low interest rates may come back to bite them.

Ciullo advises consumers to shop carefully when picking a lender. But sometimes it's difficult to compare apples with oranges. "There often are additional fees on top of appraisals and various other charges. Interest rates are just part of the mortgage package." The lender may tell you you're getting a 5% rate, "but with hidden costs that loan may be the equivalent of 5 1/4% at another bank that doesn't charge those fees." Ciullo says whatever choices borrowers make in selecting a mortgage, they should know that "1/4 of a point on a 30-year loan costs the homeowner a lot more money and the bank has a much more valuable investment. That's why many banks will absorb those fees--they make it up in the resale value of the mortgage." To help clients make the right choice, CPAs should volunteer to sit down and help them determine the true cost of credit so they can compare loan terms.

Many clients are refinancing or taking out home equity loans to free up cash to fix up their property--using the money to improve the value of the house and provide creature comforts or to consolidate debts and possibly increase their tax deductions since mortgage interest is deductible and personal interest is not.

The CPAs interviewed for this article agree with this rationale, up to a point. "You don't want to be the most expensive home on the block," says Doyle, who also serves as chairperson of the AICPA personal financial planning executive committee. "People want to live next door to better--not lesser--houses. When it's time to sell, the lower-priced houses in the neighborhood also could compete against you."

Besides, says Doyle, in this market "people already are expecting to pay an arm and a leg for a fixer-upper. Why put anything into it unless you're planning to stay for awhile?" CPAs should advise clients to make large-scale improvements only if they plan to stay in the home long enough to enjoy them, perhaps 5 to 10 years. Since most home improvements don't translate dollar for dollar to an increase in property value, remind clients they are making the renovations for themselves, not the next owner.

FIRST-TIME BUYERS

The low rates also are tempting some younger clients to become first-time home buyers: Some 42% of 2001 buyers were in this category. Many CPAs have clients who have decided that buying a house--despite the sellers' market--is the best decision for them. And while this isn't an entirely bad decision, accountants may want to suggest a little caution.

NAR President Cathy Whatley, owner of Buck & Buck Inc. in Jacksonville, Florida, says even with the strong momentum the association expects a temporary drop in home sales. "About a fifth of the country was essentially shut down for the better part of a week in February due to the huge snow storm in the East, so we shouldn't be surprised to see a negative impact on home sales," she said. "However, the disruption will only postpone transactions and we should see strong housing activity throughout the rest of the year." While that's encouraging, of course it's not a guarantee.

For many first-time buyers, affordability is a big issue. With interest rates at record lows and banks eager to lend, clients may qualify for a great deal of mortgage money, perhaps even more than they can carry comfortably. Should CPAs recommend clients borrow all they can in this low-rate environment? Ciullo recalls clients who were eyeing a luxurious $700,000 house, for which the bank recommended a 20% down payment. With help from their parents, the couple could have even gone to 40%. Or the couple could have put down only 20% and borrowed over $500,000.

But the monthly mortgage payment on such a loan would come to about $2,300 plus escrow for taxes and insurance, and the utility costs of maintaining a large home would be high. The couple's projected finances didn't make it under Ciullo's general rule: one-third of pretax income for house and mortgage, one-third to live on and one-third for taxes. So he advised them to put 30% down and reserve the balance for improvements.

How can CPA/financial planners ensure their clients--first timers and repeat buyers--survive today's real estate market? The process can be complicated and involve bidding wars, affordability, financing, contract negotiation, inspections and warranties. Here's what some advisers are telling their house-hunting clients.

COMPETING FOR WHAT YOU WANT

"Two things matter to the seller--price and terms," says Phyllis Bernstein, CPA, of New York City-based Phyllis Bernstein Consulting Inc. "He or she wants the highest price possible and the best terms available. Both of these areas leave room for negotiation. Just because a seller is entertaining multiple offers doesn't mean the client will lose the house. The offer just has to hit the right note with the seller--the one the other contracts don't."