How to Protect Yourself From a Mechanics Lien

Every homeowner who’s considering hiring a contractor to do some work in or around their house should make sure they’re familiar with their state’s mechanics lien laws before making a decision. Never heard of a mechanics lien? You’re not alone. Let’s uncover what it is and why you should protect yourself from it.

Think Twice About Not Paying

If you wind up having a beef with the contractor you employ for builds or repairs – poor workmanship, perhaps, or maybe they walked off the job before it was completed or failed to finish the work in a timely manner as promised – and you decide not to pay, that contractor can respond by attaching your house to a legal claim for unpaid work until some kind of settlement is reached.
That could turn into a waiting game if you are not considering selling your home. But, if you intend to put your home on the market in the near future, that lien could stop you in your tracks.
mechanics lienmechanics lien

What EXACTLY is a Mechanics Lien?

Sometimes known as a materialmans lien, every state has a a mechanics lien law granting tradespeople a way to protect themselves from those who fail to pay them for services and time rendered.
Here’s how Rusty Adams, a research attorney for the Texas Real Estate Research Center at Texas A&M University, described it in a recent edition of Terra Grande, the Center’s monthly magazine:
“It is an equitable interest that gives its holder the right to have satisfaction out of the property to secure payment on a debt. It is not title to the property, and a lien holder does not have ownership rights. Rather, it is an equitable interest that gives the lien holder the right to have satisfaction out of the property to secure the payment of a debt.”
In other words, it is an encumbrance the property owner must deal with, one way or another. Otherwise, it could result in a foreclosure and forced sale of your house.

How Mechanics Liens Work

None of what follows should be considered legal advice. Rather, it is intended only as a brief, mile-high overview.
A mechanics lien can be filed by anyone with a claim against the property. This concept isn’t new; for example, Uncle Sam can place a lien if you fail to pay your taxes, as can your state. Your homeowners association can do the same if you don’t pay your dues or a special assessment.
In the case of work done to your house, the contractor can file if you fail to pay, even if you feel you’re justified in withholding. The company from which he or she gets their supplies – roof shingles, for instance – can also file against your house if the contractor doesn’t pay them. And if the contractor uses subcontractors, they, too, can go against the house if the contractor doesn’t pay them.
The “very broad” law in Maryland “covers almost everything,” attorney Harvey Jacobs says. For example, if the developer doesn’t pay the paving company hired to cover your cul-de-sac, the company can file a mechanics lien against every house that touches that street. Ditto for the outfit hired to landscape, sod and plant shrubs.
mechanics liensmechanics liens

How to Protect Against Mechanics Liens

Fortunately, lien laws afford owners some protections. In some places, the amount owed must be of at least a certain amount. They also must be filed within a certain number of days from when the work was completed, and may require the property owner to be notified within a specified time that a lien has been filed.
The rules, which also apply to subs and suppliers, can be somewhat tricky for an owner to decipher. But the absolute best way to protect yourself is to require the contractor to provide lien releases before you pay anything more than your down payment. In other words, no draws or final payment until he or she certifies that everyone in the chain has been paid.
Often, says Texas attorney Adams, a notice of intent to file or the actual filing is enough to resolve the debt attached to the property without going through the process itself.
Once payment has been received, a contractor has a duty to remove the notice or the lien itself from public records. Failure to do so allows the property owner to file a lawsuit against the contractor to compel the lien’s removal. But to avoid that, Adams suggests making sure the release has been recorded.

(READ MORE: The Difference Between a Handyman and a Contractor)

Some Important Distinctions

A lien release is not the same as a lien waiver. Nor is it the same as a lis pendens. While a release removes an existing lien, a waiver is an agreement that prohibits a contractor or supplier from placing a lien on the property. But some states don’t permit waivers at all.
A lis pendens, which is Latin for “suit pending,” is a written notice that a lawsuit has been filed in the county land records office involving either the title to the property or a claimed ownership interest in it. The notice alerts a potential purchaser or lender that the property’s title is in question, making it less attractive, if only because the buyer or lender is subject to the suit’s ultimate outcome.
Beyond this, it is crucial for a homeowner to ensure the contractor, subcontractor or supplier has followed the rules of the road.  In Texas, said Adams, the claimant must give the appropriate preliminary notices, make the proper filing and give filing notice to the property owner.
mechanics lienmechanics lien
In Maryland, the unpaid amount must be at least 15% of the property’s assessed value. So if the house is assessed at $100,000, the lien must be for $15,000 or more. “Small jobs don’t count,” Jacobs said. Contractors must also file a lien within 180 days of performing the work in Maryland, but subs must file within 120 days.
In neighboring D.C., though, there is no minimum to file, and the contractor, supplier or sub has only 90 days to file.
(Note: In the case of mechanics liens, property value is an evidentiary question. Courts often use assessed value in deciding whether a lien can be brought.)
In Texas, though, contractors aren’t required to provide a preliminary notice, but they are required to present a list of all subs and suppliers before starting work. But subs and suppliers who have a contract with the original contractor must send notices to both the contractor and the homeowner by the 15th day of the second month.
As you can see, once you get into the tall grass with mechanics liens, it becomes fairly complicated. It’s at this point that it may be time to consult legal counsel.


Lew Sichelman

Syndicated newspaper columnist, Lew Sichelman has been covering the housing market and all it entails for more than 50 years. He is an award-winning journalist who worked at two major Washington, D.C. newspapers and is a past president of the National Association of Real Estate Editors.

Source: homes.com

What is a Home Equity Line of Credit?

As housing prices continue to rise homeowners are looking into how they can leverage their home’s equity to receive low-interest financing. A home equity line of credit, or HELOC, is a great way to gain access to a line of credit based on a percentage of your home’s value, less the amount you still own on your mortgage.

The downsides are that if get yourself into a situation where you cannot repay your HELOC, the lender may force you to sell your home in order to settle the debt.

How a HELOC Works

Home Equity Line of CreditHome Equity Line of Credit

Let’s say your home has an appraisal value of $400,000 and you have a remaining balance of $200,000 on your home’s mortgage. A lender typically allows access to up to 85% of your home’s total equity.

(Value X Lender Access) – Amount Owed = Line of Credit
$400,000 X 0.85 = $340,000
$340,000 – $200,000 = $140,000

Unlike home equity loans, your home equity line of credit will have a variable rate, meaning that your interest rate can go up and down over time. Your lender will determine your rate by taking the index rate and adding a markup, depending on the health of your credit profile.

When a HELOC Makes Sense

Your home equity line of credit is best used for wealth-building uses such as home upgrades and repairs, but may also be used for things like debt consolidation, or the cost of sending your kid off to college. While it may be tempting to use your HELOC for all sorts of things, such as a new car, a vacation, or other splurges, these don’t do anything to help improve your home’s value. To ensure that you will be able to pay back your loan, it’s important to focus on wealth-building attributes where you can.

Home Equity Line of Credit vs. Home Equity Loan

If you’re exploring various lending options, you’ve probably come across two different home lending terms, home equity line of credit and home equity loan.

While home equity loans give you all the flexibility and benefits of tapping into the value of your home when you need it, a home equity loan offers a lump-sum payment.

Depending on your situation, a lump-sum withdrawal may be better suited for your needs. Understanding the differences is the first step in making a loan decision that is best for you.

Home Equity Loan (HEL) – A home equity loan lets you borrow a fixed amount in one lump sum, secured by the equity of your home. The loan amount you will qualify for will depend on your Loan to Value ratio, credit history, verifiable income, and payment term. These types of loans have a fixed interest rate, which is often 100% deductible on your taxes.

Home Equity Line of Credit (HELOC) – A home equity line of credit is not so much a loan, but a revolving credit line permitting you to borrow money as you need it with your home as collateral. Applicants are typically approved based on a percentage of their home’s appraised value and then subtracting the balance owed on your existing mortgage. Things like credit history, debts, and income are also considered. Plans may or may not have regulations on minimum withdrawals and balances, as well as a variable interest rate.

Before tapping into your home’s equity, it’s important to weigh the pros and cons of each type of loan for your situation. Because your home equity line of credit and loan involves your most important asset – your home – the decision should be considered carefully. Is a second mortgage better than a credit card or a secured loan? If you’re not 100% sure, talk to a finance specialist before putting your home at risk.

Source: creditabsolute.com

How the New Tax Law Affects Vacation Home Rentals

The new tax law that took effect in January includes several changes that have a significant impact on owners of second homes, including vacation homes. It’s a good idea for current owners and those who are thinking of buying a second home to familiarize themselves with the new law now. It’s not too soon to plan for your 2018 tax returns.

The news isn’t so good for families that don’t rent out their vacation homes because they probably won’t be able to deduct as much as they have in the past. However, those who use their second homes only or mostly for the rental income may do better than they did under the old law.

A luxury home sitting on a lake shore.A luxury home sitting on a lake shore.

Deducting state taxes

The new law limits the total amount of state and local taxes you can deduct to $10,000 on a joint return for single and joint returns. The new limit covers sales, occupancy, income and property taxes, including taxes paid at closing on a new property. If you own a primary and secondary home, you will almost certainly exceed this limit. You will be able to deduct less-perhaps a lot less in property taxes than you did last year. The new limit on state tax deductibility will affect homeowners in high tax states more than others.

Mortgage interest deduction

Despite attempts to eliminate or seriously reduce its value to homeowners, the deduction for mortgage interest survived largely intact in the new law. The most significant change was the lowering of the limit on total amount of the cost of mortgage debt for all homes owned by a taxpayer.

The new law “grandfathers in” or exempts mortgage interest on homes purchased before December 15, 2017. Homes purchased after that date will come under the new lower limit for the mortgage interest deduction. Thus, homeowners who already owe $750,000 or more in mortgage debt and buy a second home this year, they can’t deduct any of the mortgage interest incurred in the new purchase.

The new law increased the standard deduction to $12,000 for single filers and $24,000 for joint returns. Because of the changes in the deductibility of state property taxes and mortgage interest, homeowners who have little or no mortgage interest and buy a moderately priced second home this year on which they pay less than 12 months of mortgage interest may find that they are better off taking the standard deduction on their 2018 taxes.

Incentives to become a landlord

For owners who want to use their second homes only for the use of their family and friends and not to rent out, the new tax law will create a disincentive to buy a home. For those who plan to rent out their property, if only for a few weeks during the year, the new law may be a boon.

Most landlords “pass-through” rental income so that it’s taxed as personal income. According to the Nolo website, if the rental activity qualifies as a business for tax purposes, as most do, you may be eligible to deduct an amount equal to 20 percent of the net rental income. If you qualify for this deduction, you’ll effectively be taxed on only 80 percent of your rental income.

Second, rental properties (even a vacation home used by the owner for several weeks a year), may not fall under the limits on deducting state taxes and the cap on mortgage interest.

Friendly realtor or landlord talking showing modern luxury house for sale to young couple customers, real estate agent discussing rental home with renters tenants, planning property purchase concept.Friendly realtor or landlord talking showing modern luxury house for sale to young couple customers, real estate agent discussing rental home with renters tenants, planning property purchase concept.

“On a rental property, you could have a mortgage of $10 million and deduct the full amount of the interest. If the property is part rental and part residence, you can deduct the mortgage interest without limitation for the period of time that it’s a rental property — provided it rented for 15 or more days,” said Robert Gilman, a partner at New York-based accounting firm Anchin, Block, & Anchin LLP recently featured in the Wall Street Journal.

If so, an owner of a vacation home that’s rented out for two weeks or more can write off on a pro-rated basis all mortgage interest and state taxes along with all other operating expenses incurred by owning and renting the property, including maintenance, advertising, and repairs.

According to Stephen Fishman on the Nolo site, “Thus, the portion of a rental host’s mortgage interest and property tax allocated to the short-term rental activity don’t come within the limits. These are rental deductions, not personal itemized deductions.”

Finally, the new tax law includes a new tax deduction for individuals who earn income from businesses owned individually or by pass-through entities like limited-liability companies or partnerships.

Family of four on wooden jetty by the ocean.Family of four on wooden jetty by the ocean.

“During 2018 through 2022, hosts will be able to use 100% bonus depreciation to write off in a single year the full cost of long-term personal property they use for their rental business. Bonus depreciation may now be used for both new and used personal property. It may not be used for real property,” writes Fishman.

Some economists forecast a drop in demand for vacation properties as a result of changes in the tax treatment of vacation homes. However, demand has remained strong in most of the nation’s vacation destinations.


Steve Cook is the editor of the Down Payment Report. He is a member of the board of the National Association of Real Estate Editors and writes for several leading Web sites, including Inman News. From 1999 to 2007 he was vice president for public affairs at the National Association of Realtors.

Source: homes.com

7 Times When It’s Smart Not to Pay Off Your Mortgage Early

Couple in front of home
Monkey Business Images / Shutterstock.com

There are plenty of reasons to pay off your mortgage early — chief among them being the many thousands of dollars in interest you stand to save.

At the same time, there also are benefits to not paying off a home loan ahead of schedule.

Which approach is the better one depends on your financial situation and goals. If one or more of the following situations applies to you, you may benefit from sticking to your mortgage payment schedule and using any extra cash for other purposes.

1. You lack emergency savings

Financial ups and downs are inevitable. The best way to ensure you can cover an unexpected expense or weather a job loss — without having to take on new debt — is to set aside some spare cash as an emergency fund.

“If you don’t have any emergency savings, work on that before paying off your mortgage, as the extra equity doesn’t benefit you like cash does,” says Pamela Horack, a certified financial planner with Pathfinder Planning in Lake Wylie, South Carolina. “If you need new tires on your car, you can only spend cash.”

For help fixing that issue, check out “9 Tips for Starting an Emergency Fund Today.”

2. You want extra liquidity

Paying ahead on your mortgage locks your extra cash in one place. In other words, by using extra cash to pay down your mortgage faster, you effectively convert a liquid asset (cash) into an illiquid asset (home equity).

Once you do that, you have only two choices for getting money out of a home: Sell it or borrow against it.

During the housing bubble a few years ago, Money Talks News founder Stacy Johnson found himself glad he had kept a good chunk of change in the bank. He was able to use it to buy the house next door cheaply and flip it for a big profit.

He explains:

“Theoretically, I could have borrowed against my house to raise the cash, but I probably wouldn’t have. Because I had the cash and it wasn’t earning much, I did something with it that earned a lot. In short, having money in the bank can really be an advantage if you’re planning to use that money.”

3. You can earn a better rate by investing

If you have extra cash to pay off a mortgage with a low interest rate but you know you could earn a higher rate of return by investing that cash, it is best not to pay off your mortgage.

“If you make a higher yield from your investments than your mortgage interest rate, you will likely be much better off in the long haul,” Abel Soares III of Hui Malama Advisors in Honolulu tells Money Talks News.

4. You want lower taxes

If you invest extra cash in a tax-advantaged account such as a 401(k) or individual retirement account (IRA), you have another reason not to funnel the funds into your home loan: lowering your current tax bill.

“Paying off a mortgage early competes with priorities that can help lower taxes, such as funding a 401(k) plan up to the maximum amount,” says Patrick Whalen, a certified financial planner at Whalen Financial Planning in Los Angeles.

A mortgage payment can also lower your taxes because mortgage interest payments are tax-deductible. But due to the significantly higher standard deductible that took effect in 2018 — a result of tax reform — fewer homeowners are likely to benefit from deducting interest.

5. Your mortgage is a hedge against inflation

A mortgage with a fixed interest rate can be a hedge against inflation, Whalen tells Money Talks News. This is because the amount of the mortgage payment is the same every month, but the value of the payment decreases over time due to inflation.

Andy Tilp, a certified financial planner at Trillium Valley Financial Planning in Sherwood, Oregon, explains it this way:

“As all your homeowner costs — such as maintenance, utilities, repairs, property tax, etc. — rise each year with inflation, the mortgage payment stays flat, assuming a 30-year fixed rate. Thus, in 30 years, what seems like a large payment now will seem relatively much smaller.”

6. Your job is uncertain

If you think you will be leaving a job and it may take some time to find another one, hold off on paying ahead on your mortgage. You might need that money to get by until your job situation settles out.

7. You have high-interest debt

If you are also paying off debt that has a higher interest rate than your mortgage — such as credit-card debt or student loans — it is technically better to put any extra funds toward that debt instead of your mortgage.

The debt with the higher interest rate is costlier. The sooner you pay it off, the more money you will save on interest over time.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com