About Real Estate: Mortgage rates may rise

Interest rates for homebuyers and those refinancing a mortgage could climb this year as the economy slowly gathers steam and the federal government tries to cover its own financing expenses.

Q. I was planning to refinance my home loan last year, but kept putting it off because rates seemed to go a bit lower every week. When I finally got around to filing the loan application in November, I was blindsided because rates went up almost half of a point in December, so I canceled the deal. Will rates start going down again in 2011?

A. Interest rates might briefly dip again in the early part of this year, but most economists say current trends suggest rates will begin a gradual but long-term rise in the spring or summer.

There are several factors behind the expected increase. One is that spending by consumers is finally starting to climb, which is encouraging some companies to borrow millions of dollars to increase production of their goods and services. When manufacturers start borrowing money, it puts upward pressure on rates charged to homebuyers and refinancers, because lenders have only a finite amount of cash to lend.

Another key reason for the expected rate hikes involves the federal government's need to finance our nation's growing budget deficit.

America gets most of the money needed to fund our various spending programs by selling long-term bonds to foreign countries. That's akin to a homeowner buying an expensive plasma TV from China or Tokyo with a credit card and then waiting to pay for it when the bill comes due later. Like a Visa or MasterCard borrower, the U.S. must eventually pay its debt, too.

Foreign buyers of our bonds today are demanding higher rates on their investments, so those bigger rates that America must offer in order to sell them to other parts of the world are “trickling down” to local homeowners who want to buy a house or refinance their loan now.

It's important to note that this year's 2011 spending deficit is about $1 trillion. But added to the annual deficits approved by Congress and financed through bonds in the past several years, our government now owes about $14 trillion to investors.

To put these mind-boggling figures into more perspective, consider this: If you spent a mere 60 seconds to read this answer to your question, Uncle Sam was busy adding a staggering $2 million to the budget shortfall through spending for social programs and payments on our debt.

All things considered, it likely would be better to refinance quickly rather than hoping for another drop in mortgage-interest rates in the months ahead. But in an interesting twist, some economists say the pending increase in rates they expect could help boost the housing market in 2011, because buyers may want to find a house and close their purchase before loan rates can climb even higher.

Q. My husband and I fell in love with a small house last month that was being marketed by an old woman. She agreed to accept our offering price and shook our hands to accept the offer, but now she wants to cancel the deal and stay in her house. I know that all real estate offerings are supposed to be “in writing,” but will the fact that I personally witnessed the woman accept the offer from my husband and then also shake my own hand help us if we sue her in court?

A. No, I don't think so.

I'm sure you aren't lying about the woman's promise to sell you the home based on the handshake deal. But real estate transactions in all 50 states — to repeat, all — must be in writing to be legally binding.

You certainly can file a breach-of-contract lawsuit against the seller, but you will likely spend lots of time and money to fight a losing battle in court. Your claim that you witnessed your husband shake hands with the gal to buy her house — and that he saw you do the same — probably wouldn't impress a judge because you apparently don't have any written documents to suggest you have the legal right to purchase the house.

Q. Can I deduct the dues I pay each month to the homeowners association that runs my townhouse development?

A. Probably not. I get this type of question several times each month, but my answer always seems to disappoint readers who own a townhouse or condo.

The Internal Revenue Service generally figures that an HOA's dues are not tax-deductible because most of the monthly fees are used to do jobs that most folks who own a single-family residence also do — stuff like hiring a private contractor to mow the lawn, or even maintain a swimming pool or hot tub.

Owners of single-family homes can't take write-offs for such expenses, the IRS reasons, so townhouse and condo owners who make payments to their homeowners association for similar costs shouldn't be able to take such deductions either.

If you own a townhouse or condo and rent it to tenants, however, you probably can deduct your HOA fees as a “rental expense” to reduce any taxes that you may owe on the rental income that you make.

Get a free copy of IRS Publication No. 527, “Residential Real Property,” by downloading it from www.irs.gov or by calling the agency for the brochure at (800) 829-3676. Also consult with an accountant or other tax specialist before claiming a deduction.

• For the booklet “Straight Talk About Living Trusts,” send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960.

© 2011, Cowles Syndicate Inc.