Mortgage Rate News

In the past, when you have a tax lien placed on your home in order for the IRS to try to get you pay what you owe, it is difficult to refinance or sell your home. This is because a tax lien means that the IRS has first claim to the money. Mortgage lenders who already lent the money would lose out by refinancing or authorizing a mortgage on a home with a tax lien, since any money that remained would go to the IRS — not the mortgage lender. So, even if you find a buyer, you may  not be able to sell your house with a tax lien.

Now, though, with the economy and housing market in so much trouble, the IRS is relaxing its stance, allowing mortgage loans to take precedence of tax liens in some cases. Financial USA points this out about the process of tax liens, and the new program:

Typically, when a homeowner owes past-due taxes, the IRS will file a Notice of Federal Tax Lien on his property, informing other creditors that the IRS has a legal claim. That claim then has to be repaid when the property is sold or refinanced-which can be problematic if the homeowner owes more in mortgage debt than the property is worth.

The new program will ease this burden by allowing certain tax liens to take a secondary position to mortgage-related liens. In some cases, the tax liens may even be discharged. When announcing the program, IRS Commissioner Doug Shulman indicated that he didn’t want his agency to inhibit distressed homeowners from taking steps to improve their finances.

Of course, it is important to realize that just because the tax liens are no longer pre-eminent, the tax liability remains. If you owe taxes, the IRS is still going to want to collect. You can find more information on requesting a certificate of lien subordination in Publication 784, found on the IRS Web site.

One of the debates that often surfaces surrounding the home mortgage loan is whether or not it is worth it to pay your mortgage off early. Since I am of the school that it is better to get out of debt as soon as possible, I tend to be on the side of doing what you can to pay off the mortgage early. Others are not so sure. The Greenest Dollar has a great article examining the debate over whether or not to pay your mortgage off early:

Don’t pay your mortgage off early

There are some compelling arguments for keeping your mortgage:

• You get a tax deduction for your mortgage interest.
• You can make your mortgage payments, and then invest the extra in the stock market. (Although for those looking to make immediate returns, this may not be the best move right now.)
• You have more liquidity when your assets aren’t all tied up in your house.

Pay your mortgage off early

Of course, the flipside is that there are definite advantages to paying your mortgage off as soon as possible. (The Greenest Dollar points out that “mortgage” is French for “death contract.”)

• The feeling of freedom you have when you get rid of a rather large obligation. (Stress is reduced as well.)
• Once you pay off the mortgage, your monthly liquidity returns, since you have that cash that would have gone to the mortgage payment.
• You actually own your home. Remember: As long as you have a mortgage, you do not actually own your home. The mortgage lender does.
• You save a great deal of money in interest payments — more than you can save in tax deductions.

One way you can pay off your mortgage early is to set up payments on a biweekly schedule, rather than a monthly schedule. This way you get one extra payment a year. Another thing you can do is send an extra payment when you have the money, designated as “for principal only”, to reduce the amount you owe. Just make sure that your mortgage doesn’t come with a prepayment penalty.

All sorts of ideas are floating around as our leaders try to get a handle on the economy. Indeed, there are a number of ideas out there, all of them designed to help stimulate the economy. Sometimes it seems as though our leaders are just tossing things up against a wall to see what will stick — more specifically what the market seems to think will fix the economy.

One of the ideas has been to force mortgage interest rates lower, to 4.5%. This idea is meant to spur refinancing and also new home buying. It won’t really stop a lot of foreclosures, but it might stimulate other economic activity. Loan modification is also being proposed.

And, of course, another economic stimulus package is being sought. This next package is expected to be about $1 trillion. Of course, it has be talked up. The American public is a little wary of more bailouts and stimulus packages, so we’ll have to be talked into the idea of such a large sum. Perhaps if enough is included for the middle class, such a bailout will be accepted. But what is really interesting right now is the income tax holiday being proposed in some circles.

Income tax holiday

An income tax holiday would be different from an economic stimulus package. The government was disappointed that the eariler stimulus package this year didn’t result in more spending. So they’re hoping that an income tax holiday would encourage spending. But, really, it’s probably more of a political ploy. BloggingStocks reports on what economist Richard Felson says about an income tax holiday:

“I’m sure taxpayers, particularly those in upper income groups, would love a suspension of tax collection for three or four months,” Felson said. “But there’s a danger that middle income taxpayers would save a great deal of their dollars, and like the earlier tax rebate, it ends up stimulating the economy very little. Who knows? Maybe in this environment rich Americans would end up saving a lot of it too, so I don’t see it as a prudent stimulus option.”

In the end, I’m not sure that there really is a way to force the economy to play nice.  Instead, we may just have to ride this one out.