The EMG Blog

Charlie Christensen

Relocation Considerations

Consider this common scenario faced by many employees: Your supervisor calls you into her office on a Friday afternoon and asks you to transfer to the New Jersey office. She says the new job includes a $10,000 increase in salary and loads of potential “in the future.” She gives you the weekend to think about it. What do you say? No doubt, a million questions start popping into your head. You’ve heard New Jersey is expensive to live in. Is $10,000 enough? How much are the houses? What will your property taxes be? What about income taxes? What about your wife’s job? Will the kids like it there? Will you like the new job? What is the impact on your career if you refuse the job transfer?

According to psychologists, relocation is among the most stressful events that can happen to a person or family. Changing jobs, which often occurs when relocating, is also high on the stress index. For many people the decision to relocate involves a complex set of variables of a financial, personal and emotional nature. These factors contribute to the stress in varying degrees, depending upon the individuals involved. The questions above can be broken down into two broad categories: objective and subjective. The emotional and personal aspects of relocation are subjective and thus difficult to model. Fortunately this is not true of the financial ramifications, which are more objective and easier to quantify. This article will discuss many of the financial variables which should be considered by employers and employees before a relocation decision is made.

When deciding on compensation packages for transferred employees, employers often do not consider that each employee is an individual, with unique financial considerations. No two families are alike and a relocation analysis must reflect differences in income tax brackets, housing size, property taxes, spousal income, dependents, etc. Using generic cost of living indices does not produce an accurate calculation of the financial impact of relocating. Using only a customized analysis will produce a true “apples to apples” comparison. The battle cry of the relocating employee is “AT LEAST KEEP ME WHOLE.” In other words, the employee should not have to relocate, absorb the emotional stress, and lose money as well. The after tax cash flow should be at least zero.

An accurate, individualized, analysis has other benefits for the employer.
These are:

  1. If the employee is presently living in a high cost of living area, and the employee is moving out of this area to a lower cost of living area the analysis will most likely show a positive cash flow, which will encourage the employee to relocate.
  2. Employers in low cost areas will find the analysis useful in encouraging employees to transfer into the area from higher cost of living areas, since the analysis will probably show a positive cash flow. Lower salaries can be justified, and demonstrated to the employee, thus saving expenses.
  3. Employers in high cost of living areas can use the analysis for employees moving into the area, from lower cost areas, when cost of living concerns are negatively impacting the relocation decision, and there is a resistance to relocation. An analysis may convince the reluctant employee that the after tax cash flow isn’t as bad as they thought. Often, reluctant employees must relocate to high cost areas for career advancement purposes, but want just compensation, calculated in gross salary dollars. A confidential analysis will show an employer how much the employee should be equitably paid, to compensate for cost of living differences.
  4. Employers can use the analysis to make sure employees are comparing apples to apples in their relocation decision. Many employees attempt to upgrade their standard of living, usually through unfair housing and community comparisons, at the employer’s expense.

Most employees and employers perform a very superficial analysis of the financial impact of relocating. This is understandable since it is very complicated from a tax and financial planning point of view. The typical analysis involves a comparison of housing in the new area with the increased salary offer, if any. Or the salary is set based upon a comparison to other employees in similar positions. The effect upon a family’s cash flow in the first year after the move is much more complex than this simple analysis. As a result costly errors can be made which affect not only the family’s financial health but also their happiness as well. An employee who feels unfairly treated is not as productive and may seek other employment. If the employee is worth relocating he/she is worth fair compensation. After all, if suitable talent were available locally the relocation would be unnecessary. Relocation mistakes result in further relocation and additional stress for both the family and for employers. Performing a proper analysis before a relocation offer is accepted reduces stress by decreasing uncertainty. This allows the employee to evaluate the relocation offer more accurately and provides benefits to the employer by increasing employee happiness and retention.

Before describing the financial changes caused by relocation in more depth it should be noted that the analysis should be performed, not just for the relocating employee, but for the entire family. Often relocation can cause major financial changes for spouses, companions, children, dependent parents, and others. Also, all changes should include the federal, state and local tax impact, where appropriate, at the individual’s projected marginal rates of tax.

The analysis should compare the old salary with the change in family salary, wages, and business income. It should not include changes that would have occurred anyway had the family not relocated, since this would obscure the real cost, and would be unfair to the employer. The change should be net of federal, state, and local (city) income taxes, as well as social security taxes. A common problem experienced by many families, sometimes called the “trailing spouse” problem, occurs when the spouse of a relocated employee experiences great difficulty finding employment in the new area. The analysis should be able to analyze the projected decrease in the spouse’s income for the first year after the move.

Another area often neglected by relocating individuals is the change in wealth caused by changes in automobile expenses. This can be caused by changes in commuting distances, automobile insurance rates, personal mileage (for example to return home to see friends and relatives, or to access qualified medical care), tolls and parking, use of a company car, or an increase or decrease in amounts paid by employers for business use of your personal car. Some of these changes have tax effects and some do not. Most people underestimate how expensive it is to operate an automobile, probably because the major portion of the expense is depreciation (a non cash item), and because the expenses are paid gradually.

Changes in job benefits are often a factor if the employee is changing employers, and occasionally when transferring within the firm. Items to consider here include changes in medical insurance, life insurance, plans, and other perquisites such as day care.

Changes in state and local income taxes should be included, net of federal tax effects. The family’s income should be recalculated using the tax laws of the new state, and city (if there are city income taxes). Consideration must be given for employees choosing to live in one state and work in another, such as the millions of people who live in New Jersey and work in New York. In such cases they will pay non resident income taxes in the state they are working in. Most states have reciprocity agreements to prevent double taxation, which permit residents to deduct taxes paid to other states.

Changes in housing costs are, of course, a major item. It is important to make valid, meaningful, comparisons when comparing housing costs between areas. For example, comparisons should be made which compare the same size houses (square footage). Also included should be the real estate taxes, and rent, if the individual is not buying. Of course, the federal income tax impact of these changes should be included. Another factor to be considered is the change in interest rates caused by exchanging the old mortgage for a new one. If the employee is buying a cheaper house in the new area he/she may incur federal and state capital gains taxes. This tax should not be included in the analysis because it occurs only once, and should not be part of the calculation of ongoing salary. Of course, the employee should be reimbursed for this tax, since the relocation caused the imposition of the tax. Likewise, if the relocation causes the family to have to sell investment real estate, a partnership, or stock in a closely held business then there will be capital gains or losses incurred because of the realization of gains or losses on the sale of these assets. Distance or increased job responsibilities may require that these investments be sold. If the family wishes to compare owning vs. renting, or renting vs. owning, the analysis should be able to do this, although it may not be a fair comparison for negotiation purposes.

Finally, the analysis should not include the cost of moving household belongings, travel expenses including meals and lodging for the family, temporary living expenses in the new area, pre move house hunting trips, real estate agent’s fees, legal fees to buy and sell houses, points to payoff an old mortgage or secure a new mortgage, and redecorating expenses. These expenses are one time expenses which will not repeat in future years, and therefore should not be included when calculating salary. Of course, the employee should be reimbursed for these expenses, but if the purpose of the analysis is to show gross salary equivalents then moving expenses should be excluded, since they are not recurring. Most employers will pay some or all of these expenses, but it is wise to be specific about what will be reimbursed. The reimbursement of deductible expenses is not taxable, while the reimbursement of non deductible expenses is completely taxable. Therefore the employee must be reimbursed for federal, state, local, and social security tax impact on the portion of the reimbursement which is non deductible. This is called a tax gross up payment. Since the tax gross up payment is also taxable the calculation becomes a little complex. Many employers do not calculate this amount correctly. They usually do not reimburse for the state, local and social security tax impact and they assume all taxpayers are in the same tax bracket.

This article has highlighted the important financial variables which should be considered when making salary offers to employees who are relocating. An analysis based upon a superficial comparison of cost of living indices does little to reduce the very significant stress associated with relocating and changing jobs. The analysis must be individualized to each family, since families have different financial profiles such as different incomes, house sizes, etc. Relocation can be a significant financial planning tool when relocating to a lower cost of living area, which can increase cash flow and provide significant lifetime benefits which will help employees achieve their financial goals. A thorough analysis will not only reduce pre move stress by eliminating financial uncertainty but will increase post move happiness for all involved.

*The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.

Adjustable Rate Mortgages (ARMs)

These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home.

However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.

There are also mortgages that combine aspects of fixed and adjustable rate mortgages – starting at a low fixed rate for three, five, seven to ten years, for example, then adjusting to market conditions. Ask your mortgage professional about these and other special kinds of mortgages that fit your specific financial situation.

Please visit our Disclosures page for more details for all loan types.

*The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.

Fixed Rate Mortgages

The most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.

Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also “biweekly” mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 “months” worth, every year.)

Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.

During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.

Please visit our Disclosures page for more details for all loan types.

*The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.

Subprime Loans

Subprime loans are pretty much a thing of the past. Wall Street and the major banks got greedy and kept loosening the qualifying terms of subprime loans and as a result, we all know what has happened to our economy.

Following was the original logic behind subprime loans… it was only after little to no downpayment was required that the bubble burst… and burst big-time.

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If you have bad credit, you may not qualify for a conventional loan or a low down payment loan offered by FHA and VA. In this case, you may consider a subprime mortgage. Because of the higher risk associated with lending to borrowers that have a poor credit history, subprime loans typically require a larger down payment and a higher interest rate.

You should study the specific terms of a subprime loan that you qualify for to determine if it is a loan that will help your financial situation. Subprime loans are one way for you to get into the home you want at today’s price. If you already own a home, a subprime loan can give you an opportunity to clean up your credit and ultimately refinance into a lower rate at a later time. If you have a mortgage, you can look at refinancing more than what you currently owe on the house and get cash back for the equity you already have in the home. This cash out could be used to pay off higher rate credit cards, bankruptcy, foreclosure or collections and liens. It could be a good way to clean up a troubled credit history, save money each month and start rebuilding your credit worthiness.

Whether for a purchase or refinance, subprime loans should typically be used as a short term solution, approximately 2-4 years. During that time, you can work to clean up your credit and qualify or a refinance into a lower risk, lower rate loan.

Prior to 1990 it was very difficult for anyone to obtain a mortgage if they did not qualify for a conventional, FHA or VA loan. Subprime loans were developed to help higher risk borrowers obtain a mortgage. Many borrowers with bad credit are good people who honestly intended to pay their bills on time. Catastrophic events such as the loss of a job or a family illness can lead to missed or late payments or even foreclosure and bankruptcy. Now there are mortgage companies that take into consideration events outside the borrower’s control, but not without a price.

Lenders are compensated for risk in the form of interest rates. The higher the lender perceived its risk to be, the higher the rate they will charge for the privilege of borrowing their money. The lower the risk, the lower the rate. Several risk factors are taken into consideration when evaluating a borrower for a subprime mortgage, the most important being your payment and credit history.

Your debt to income level, employment history, type of property and assets are other factors that are taken into consideration when determining if you qualify for a conventional, government or subprime loan.

*The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.

Conventional and Jumbo Loans

Conventional loans are secured by government sponsored entities or GSE’s such as Fannie Mae and Freddie Mac. Conventional loans can be made to purchase or refinance homes with first and second mortgages on single family to four family homes. Down payments as low as 3% are now available!

In general, Fannie Mae and Freddie Mac’s single family, first mortgage loan limit is $417,000 in 2011. This limit is reviewed annually and, if needed, changed to reflect changes in the national average price for single family homes.

As part of the economic recovery efforts, temporary “high balance” loan limits have been implemented and they vary by county but most of the SF Bay Area counties allow a $729,750 loan amount on a 1-unit property. Call us for the limit in your county.

2011 Conventional Loan Limits

First mortgages

  • One-family loans: $417,000
  • Two-family loans: $533,850
  • Three-family loans: $645,300
  • Four-family loans: $801,950

Note: Maximum original loan amounts are 50 percent higher for first mortgages on properties in Alaska, Hawaii, Guam and the U.S. Virgin Islands.

Second Mortgages

  • Second mortgages have become very restrictive due to the foreclosure crisis and liquidity needs of the banks. Call us for personalized info.

Jumbo Loans

  • Loans which are larger than the limits set by Fannie Mae and Freddie Mac are called jumbo loans. Because jumbo loans are not funded by these government sponsored entities, they usually carry a higher interest rate and some additional underwriting requirements. A strategy to lower your overall interest payments if your purchase or refinance balance is above $417,000 is to use a combination of both first and second mortgages. Every situation is different, but it is one more option to consider.

In addition to common loan structures such as fixed rate, adjustable rate and balloon loans, Fannie Mae and Freddie Mac also have loan programs for low to no down payments, community lending and affordable housing initiatives, and reverse mortgages.

Please visit our Disclosures page for more details for all loan types.

*The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.

Choosing a Loan Program

There isn’t a single or simple answer to this question. The type of mortgage for you depends on many different factors:

  • Your current financial picture
  • How you expect your finances to change
  • How long you intend to keep your house
  • How comfortable you are with your mortgage payment changing

For example, a 15-year fixed rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower monthly payment than a fixed rate mortgage, but your payments could get higher when the interest rate changes.

One way to find a good answer is to discuss your finances, your plans and financial prospects, and your preferences frankly with a mortgage professional.

Please visit our Disclosures page for more details for all loan types.

*The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.

PMI Payment Options

Private mortgage insurance can be paid on either an annual, monthly or single premium plan. Premiums are based on the amount and terms of the mortgage and will vary according to loan-to-value ratio, type of loan, and amount of coverage required by the mortgage company.

Under an annual plan, an initial one year premium is collected up front at closing, with monthly payments collected along with the mortgage payment each month thereafter. Monthly plans allow a borrower to pay only 1 or 2 months worth of premium at closing, and then on a monthly basis along with the regular mortgage payment. Under a single premium plan, the entire premium covering several years is paid in a lump sum at closing. Typically, homebuyers choose to add the amount of the mortgage insurance premium to the loan amount. By doing this, homebuyers can reduce their closing costs and increase their interest deduction.

*The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.

Private Mortgage Insurance

Private mortgage insurance is a type of insurance that helps protect the mortgage company against losses due to foreclosure. This protection is provided by private mortgage insurance companies and allows mortgage companies to accept lower down payments than would normally be allowed.

Private mortgage insurance also enables mortgage companies to grant loans that would otherwise be considered too risky to be purchased by third party investors like the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). The ability to sell loans to these investors is critical to maintaining mortgage market liquidity, which in turn, allows mortgage companies to continue originating new loans.

*The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.

Homeowners Insurance Information

When you insure your home, you should insure your home for the total amount it would cost to rebuild your home if it were destroyed. If you don’t have sufficient insurance, your insurance company may only pay a portion of the cost of replacing or repairing damaged items.

There are three ways to insure the structure of your home:

Replacement Cost: Insurance that pays the policyholder the cost of replacing the damaged property without deduction for depreciation, but limited to a maximum dollar amount.

Guaranteed Replacement Cost: Insurance that pays the full cost of replacing damaged property, without a deduction for depreciation and without a dollar limit. This coverage is not available in all states and some companies limit the coverage to 120 percent of the cost of rebuilding your home. This gives you protection against such things as a sudden increase in construction costs due to a shortage of building materials.

Actual Cash Value: Insurance under which the policyholder receives an amount equal to the replacement value of damaged property minus an allowance for depreciation. Unless a homeowner’s policy specifies that property is covered for its replacement value, the coverage is for actual cash value.

For a quick estimate of the amount to rebuild your home, multiply the local building costs per square foot by the total square footage of your house. To find out the building rates in your area, consult your local builders association or real estate appraiser.

Factors that will determine the cost to rebuild your home:

  • Local construction costs
  • The square footage of the structure
  • The type of exterior wall construction: frame, masonry (brick or stone) or veneer
  • The style of the house (ranch, colonial)
  • The number of bathrooms and other rooms
  • The type of roof
  • Attached garages, fireplaces, exterior trim and other special features like arched windows.

Also be sure to check the value of your insurance policy against rising local building costs each year. Ask your insurance agent or company representative about adding an “Inflation Guard Clause” to your policy. This automatically adjusts the dwelling limit when you renew your policy to reflect current construction costs in your area. Also, be sure to increase the limit of your policy if you make improvements or additions to your house.

*The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.

Refunds Ready on FHA Loans

If you have ever paid off a home loan backed by FHA, you may have money owed to you. And the government wants to pay you back.

About 1 in 10 FHA borrowers leave money in their escrow accounts when they pay off their loans. The average refund for each borrower is about $700.

Former FHA borrowers who think they might be due a refund can call a toll free number, 800-697-6967, write HUD at P.O. Box 23669, Washington DC 20026-3699, or look for his/her name with the HUD Refund Search Form on their web site.

*The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.

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