Put preferred rate in a home offer

Q: I would like to make a home purchase offer with a 15-year mortgage, a 20 percent cash down payment, and a 5 percent interest rate. After the home seller accepts my offer, suppose the bank approves my mortgage at terms other than what I specified. Can I back out of the purchase contract or do I have to accept the offered interest rate?

A: Yes, you can make your home-purchase offer contingent upon obtaining a mortgage at the terms you specify in the offer.

However, if you make a good-faith effort by applying with several mortgage lenders and cannot obtain the specified mortgage terms, then you can either accept the best available terms or show the seller the contingency can’t be met and get your earnest money deposit refunded.

But a better tactic before shopping for a home is to first get pre-approved in writing by a mortgage lender. Then you will know the mortgage terms available, contingent on the home appraising for the purchase price you offered and the seller accepted.

Q: We recently sold a rental house. I wonder (1) do we owe full capital gains tax on the difference between our purchase and selling prices, and (2) can we deduct our capital improvements and the sales commissions paid?

A: Unless you made an Internal Revenue Code 1031 tax-deferred exchange of the rental residence for another rental property of equal or greater cost and equity, your capital gain is taxable.

The capital gain on the sale is the difference between the property’s “adjusted sales price” and its “adjusted cost basis.”

Adjusted sales price is the net sales price. That means gross sales price, minus expenses such as the sales commission, transfer tax and other sales costs.

Adjusted cost basis is the purchase price, plus capital improvements added during ownership, minus depreciation and casualty losses deducted during ownership. In other words, the capital improvements are an addition to your original purchase price. For full details, please consult your personal tax adviser.

Q: I just purchased a new rental house. I am tracking all the expenses and plan to depreciate the house. What accounting forms do I need? Should I set up a LLC?

A:You have a very simple rental house situation. Get a copy of income tax return Schedule E to see what expenses you can deduct for your rental house. This is the same form where you will report rental income.

If you own just one rental property, it might be a waste of time to create a LLC (limited liability company) because the costs for LLCs can be quite expensive. Of course, be sure to carry adequate liability insurance to avoid potential negligence losses.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.