3-2-18: What is the cost of waiting?

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Question of the week: What is the cost of waiting?

 

Answer: Last week we discussed if we are in a housing bubble and if I thought it could pop and send real estate prices, at least in Southern California, tumbling again. The follow up to that question is, what is the cost of waiting if you feel the market will decline in the future and are waiting “buy the dip” when you feel that occurs.

 

This is something I analyze about once a year and it is time to revisit the topic. Past performance is no indication of future performance, but can give us a look at the costs associated with waiting to purchase should prices and/or rates continue to go up.

 

In January 2017, the median price of a home in Los Angeles County was $509,130; in January 2018 the median price was $564,100.  The 30-year fixed rate I quote every Friday was the same on the last Friday of January 2017 as it was on the last Friday of January 2018 at 4% (after dipping as low as 3.625% in late summer early fall) to the cost of money was constant.

 

Assuming 20% down what was the cost to those who waited to purchase in January 2018 instead of purchasing the year before? Here we see the difference in down payment and monthly mortgage payment between purchasing the median home in January 2017 verus January 2018:

 

PRICE  LOAN AMOUNT RATE  PAYMENT MONTHLY  DOWN PAYMENT
 $       509,130  $     407,304 4.000%  $      1,945  $        101,826
 $       564,100  $     451,280 4.000%  $      2,154  $        112,820
 DIFFERENCE  $         209  $          10,994

 

 

As you can see, waiting one year—even with no change in rates, increased your down payment by 10% and your monthly payment by 10%. In the first year of home ownership the cost of waiting from 2017 to 2018 cost about $13,500—and the cost will increase about $2500 per year. (Note the actual cost is higher since you will have higher property taxes with the higher purchase price.)

 

From a qualifying standpoint, if your monthly payment for the mortgage (not including taxes, insurance, homeowners association if applicable) cannot exceed 30% of your monthly income then from January 2017 to 2018 you would need to make about $8400 more per month to qualify.

 

To recap, by waiting from last year to this a home buyer in Los Angeles County needed to earn over $8400 to qualify for the loan, spend almost $11,000 more in down payment and have mortgage payment that is $2500 more per year.

 

Let’s play what if….What if you are ready to buy today but decide to wait for prices and/or rates to dip back down? And what if during this waiting period prices and/or rates go up? Here is a chart showing price increases of about 5% from today’s median price and rates going up to where I, and others, think we may be by the end of 2018:

 

PRICE  DOWN PAYMENT  LOAN AMOUNT**  PAYMENT 4.375%  PAYMENT 4.50%   PAYMENT 4.625%  PAYMENT 4.75%
 $  560,000  $  112,000  $      448,000  $        2,237  $          2,270  $        2,303  $          2,337
 $  585,000  $  117,000  $      468,000  $        2,337  $          2,371  $        2,406  $          2,441
 $  615,000  $  123,000  $      492,000  $        2,456  $          2,493  $        2,530  $          2,567
 $  645,000  $  129,000  $      516,000  $        2,576  $          2,615  $        2,653  $          2,692

 

Digging into this a little bit, if prices do not go down but rates do you can payment increases of about $33 per month. If the rate stays the same but the prices increase you can see payments go up over $100 per month for every 5% increase in price, and the amount of money needed for down payment will increase as well. Should rates and prices continue to climb the amount of money needed to for down payment and monthly payment increase exponentially.

 

I have ** Loan Amount because as the loan amount increases there is a very good chance that you could move from the conforming rate to the high-balance rate—further exacerbating the monthly cost for the mortgage.

 

There are always a lot of what-ifs when we consider the future and try to predict anything, especially markets. However, there are a lot of factors that would support the chart immediately above, from economic growth to homeowners not selling as frequently as they have in past markets which leads to inventory scarcity.  All the data I see supports that if you are ready to purchase a new home now you should not wait as the downside of higher costs and payments is more likely, in my opinion, than any potential upside to lower costs and payments dependent on prices and/or rates receding enough to make the wait worthwhile.

 

Using those who waited through 2017 as an example, those who were ready in January 2017 that are still waiting have seen not only prices but also rates increase through February, making that wait even more costly.

 

Are you ready to buy? Call me to discuss your options and abilities in today’s market, or find out what needs to be done so you are ready to buy sooner rather than later.

 

Have a question? Ask me!

 

We have a new Fed head, Jerome Powell steps into the chair, previously occupied for the past four years by Janet Yellen. On Tuesday Powell had his first public testimony and told Congress he sees a strengthening economy but did not go so far as to answer directly questions from members of Congress if this means he sees four rate hikes this year instead of the previously assumed three rate hikes. Naturally his not saying, “there will not be four hikes” caused investors to sell on bonds and mortgages pushing rates up.

 

The second adjustment to Gross Domestic Product for the last quarter of 2017 was released and saw a slight revision downward, from 2.6% growth to 2.5%. This had minimal impact on rates. There was no impact on rates with this data.

 

There was some positive economic news this week for workers. In February, personal income rose a very strong 0.4%, the second such monthly increase in a row. Higher wages are great, but what was really strong was the 0.9% increase in disposable income due to the tax cuts hitting paychecks with the reduction in automatic withholdings. With prices up only 1.7% for the year workers are seeing their dollars stretch a bit further.

 

Rates for Friday March 2, 2018: Markets continue to be fairly volatile inter- and intraday depending on the news—either economic or political. When there is this type of volatility it usually suggests there is a breakout, either up or down, approaching. We have a rarity with mortgage rates for 2018 as the conforming rate has remained unchanged for three Fridays in a row, the last time that happened was in mid-December to early January (when we went eleven weeks in a row with no week-to-week change). We always like stability—however I am cautious as to how long we will enjoy it. Lock your rate when you can.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                       4.50%      Flat

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

The Academy Awards are this weekend and I cannot recall the last time I saw so few of the Best Picture nominees—many are on our list to see but we have not had the opportunity to see them. Leslie and our youngest daughter are big fans of the award show, I am not so excited so will no doubt be watching something on Netflix while they are cheering or jeering through the show.

 

Nice to have some rain today, stay safe on the roads!

 

Have a great week,

 

Dennis

2-23-18: Do you think we are in a real estate price bubble that is coming to an end soon?

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Question of the week: Do you think we are in a real estate price bubble that is coming to an end soon?

 

Answer: This question, or some variation, has been asked by several different people in several different settings in the past few weeks. From clients, to real estate professionals, to friends, to attorneys and accounts asking in my office, on the phone, at dinner and in networking meetings, everyone wants to know, will housing markets drop precipitously in the near future?

 

My short answer: No. No, I do  not think we are in a real estate price bubble that is ending soon.

 

My long answer: why I feel this way.

 

One underlying facet to the question is everyone’s experience from the 2007-8 market crash, and the expectation that it will be duplicated because we have experienced a very large increase in real estate prices in the past 5-6 years, similar to the home price increases in the early 2000’s.

 

Comparing our current market to the market at the beginning of the century is not comparing similar actions and motivations of the buyers in the markets.

 

The pre-recession housing bubble was created by several factors. First, was the ease of financing. Following the lead of hard money, then soft money, lenders, Fannie and Freddie were purchasing mortgages from lenders that required no verification of income or assets and in many instances required no appraisal. Further, they were buying loans that were secured by homes with no equity—borrowers were also obtaining second mortgages, usually HELOCs, that took their total loan to value to 100% of the property value.  This easy money enabled many people to purchase homes, or refinance current homes and pull out equity, well above the prices and mortgages they would normally be able to qualify for, which often resulted in borrowers choosing adjustable rate mortgages for lower payments.

 

Second, were the motivations for much of the purchasing activity. Prices go up based on purchases not on refinances, the closed sales become comparable sales used for the next sales in a neighborhood. As prices rose many people felt that had to buy right away or miss out, not just on buying a piece of property but also on the money that could be made as the market went up. The shift in purpose that we saw was people buying investments they would live in instead of buying homes. They were motivated by trying to capitalize on a market, which resulting in highly leveraged and risky purchases, with the intention of selling or somehow cashing out—which was done with refinancing, pulling out equity and using this equity for consumption of goods and services.

 

Third, once the market softened homeowners who were highly leveraged, in mortgages they could not afford once they adjusted, and had little to no money in their home from their savings, found it easier to walk away or sell at a loss than homeowners who purchased in conventional markets.

 

Today, there is a healthy foundation to the housing market. Changes in underwriting policies have ensured that borrowers have the income to debt ratios and credit history to afford their mortgages. When purchasing they have down payment into the property, i.e. “skin in the game.” One more solid piece of this foundation, the overwhelming majority of homeowners who have mortgages that are long term low fixed rates.

In one market you had speculative purchasing, made with little to no down payments, financed with non-qualifying mortgages, many of which were non-fixed rate products. In the other market you have buyers purchasing homes for the long term, purchasing with down payments and financed with long term fixed rate mortgages with low interest rates.

 

If/when there is a turn in the housing market and we see prices flatten, or even dip, there will not be the resulting sharp drop in prices across regions because of the solid foundation that has been built with qualified, well-motivated homeowners. Bubbles pop and created market downfalls not because of a slight correction, but because that correction snowballs as owners panic and sell their product, thereby creating significant over-supply and exponential price declines. With families owning homes they can afford to retain and having purchased with their hard earned savings, a dip in the market will not create a panic-selling environment for any significant portion of the market to create a crash.

 

The most significant threats I see to housing in California, particularly along the coastal markets (which I define as any county that touches the Pacific) are cash for purchasing homes and interest rates. Both of these factors can limit buyers ability to qualify as home prices climb.

 

At some point prices will flatten, and possibly decline, I do not see this happening in the near future, but when this occurs it will not be long lived nor a deep decline in housing prices across several markets in the region, state or nation.

 

Have a question? Ask me!

 

Overreaction? On Wednesday the minutes were released from the January Federal Open Market Committee (FOMC), the group at the Federal Reserve that determines the federal funds rate. Almost immediately after the minutes were released, well immediately after investors had time to read them and then take action in the market, rates jumped as investors sold off bonds and mortgages. Why? Because the Fed has adjusted its economic outlook since its December meeting, forecasting stronger economic growth than previously thought and achieving the 2% inflation target sooner than previously thought. The minutes also showed that the FOMC members still feel that the economic outlook supports further “gradual increases” in the federal funds rate. Many investors trying to read the tea-leaves felt the Fed maintaining its stance was instead a signal that it will raise rates more than previously estimated (three times this year). This created a sell-off that became more pronounced as the day progressed spiking rates.

 

Rates for Friday February 23, 2018: After Wednesday’s big sell off investors returned to market with cooler heads on Thursday and Friday as investors bought back into the bond markets and over the two days scratched back almost all the losses. We see a slight bump in high-balance rates, but conforming holds on for the second straight Friday with no change. As we have been saying for over a month, rates are volatile so lock when you can.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                       4.50%      Up 0.125%

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Busy weekend for the Smith household as we host about 20 fifteen and sixteen year old’s for our daughter’s Sweet Sixteen party. Hopefully the weather cooperates and is not too chilly since we are setting up for an outdoor formal event. It is fun watching our little ones become young adults and see their friends grow and mature right alongside them. Sunday will be having family over for another celebration, and then perhaps a nap!

 

Have a great week,

 

Dennis

2-9-18: What is the impact from the falling stock market prices on mortgage rates?

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Question of the week: What is the impact from the falling stock market prices on mortgage rates?

 

Answer:  Before we answer the question, let’s do some Econ 101 review on stocks, bonds, rates and markets.

 

Traditionally there is an inverse relationship between stocks and bonds, when stock prices go up, bond prices go down and vice-versa, remembering that when bond prices go up rates go down, when bond prices drop rates rise. Therefore if stock prices drop, traditionally bond prices rise which means interest rates drop.

 

The underlying reason for the inverse relationship is that stocks are inherently volatile and bonds are inherently stable. When you purchase a bond, and keep in mind your mortgage is someone else’s investment that acts like a bond, you are buying a fixed return for a fixed period of time. If you purchase a 10-year bond for $1000 paying 5% per year, you know you will receive $50 per year in interest. In ten years, after receiving $500 in interest payments you will receive your $1000 initial investment back.

 

If you purchase $1000 of stock in DCSmithCo you may receive 20 shares if you purchase on Monday, 21 if you buy on Tuesday or 18 if you purchase on Wednesday. When you go to sell your shares in the future you may receive your original $1000 back, or $1250, or $875 depending on the market conditions.

 

Because of the volatility of stocks, when there is an “event” that creates uncertainty, investors will engage in “flight to safety,” taking their money out of stocks and purchase bonds. Supply and demand: selling stocks puts excess supply in the market causing prices to drop; buying bonds puts excess demand in the market causing prices to rise—and rates to drop.

 

Fundamentally, when there is a large sell-off, or correction as we appear to be having, in stocks investors selling their stock holdings purchase bonds causing rates to drop.

 

That is not what happened this week. Investors have been selling both stocks and bonds.

 

Why was the traditional relationship broken?

 

An underlying, perhaps overlying, reason for the sell-off in the stock market that started last Friday was concern about rising interest rates by investors. The Fed has been taking actions to create higher interest rates. First, they have announced that there will be at least three increases to the Fed Discount Rate in 2018, which will trickle through to increases in the prime rate, which trickles to other consumer rates. Second, the Fed has begun to sell off Treasury bonds and mortgages it began purchasing in 2008. Selling up to $30 billion per month of these assets, the Fed is adding supply to the interest rate market. What happens when there is over-supply in bonds? Prices drop which means rates rise.

 

With the expectation for higher rates, with the action by the Fed to increase rates by selling interest bearing assets in the market to support those expectations, Mortgage Backed Securities (MBS) have seen prices drop causing rates to rise. Reminder, MBS are the financial instruments that are bought and sold that determine mortgage rates.

 

What is the impact on falling stock prices on mortgage rates? In this current cycle, there is no impact on mortgage rates from falling stock prices. However, falling bond prices (which means higher rates) have had an impact on stock prices, causing them to fall.

 

Markets are very volatile right now as the stock market goes through a correction and the bond and mortgage markets search for stability trying to understand the impact the Fed asset sell-off will have in the long term.

 

 

Have a question? Ask me!

 

There was no significant economic data released this week that would impact mortgage rates—or stock prices. The only somewhat meaningful set of numbers released this week was unemployment claims for the week of February 3rd, which showed 221,000 initial claims filed and continuing claims down 33,000 to 1.9 million still on the rolls. What was very significant about the Department of Labor report was the four-week moving average of initial claims is the lowest in 45 years. The last time there were this few unemployment claims filed the American work force was at approximately 88.4 million workers, compared with approximately 161 million today.

 

While the number itself is not a direct impact on rates, the underlying message of a strong labor force that is showing more being employed and upward pressure on wages lends support to higher rates as they reflect a growing economy. The extrapolation is this will bring inflation and unless rates are higher inflation could become an economic danger, eroding returns on investment and slowing growth as people are priced out of consuming certain products and services. This is the real basis for the volatility in our markets—higher rates and potential inflation.

 

 

Rates for Friday February 9, 2018: As I type this Friday morning from the tire story, see below for those curious, mortgages are seeing their first real positive day in over a week. Is it a short-term blip slowing rising rates, or have we seen the recent jump in rates halted until the next cycle? Conforming rates are up another one-eighth of one percent (0.125% ) from last Friday, the third week in a row with such an increase, but high-balance conforming rates are flat from last week. Anyone who is thinking a downside rate correction is very near and is floating to capture a dip is taking a very big risk. Something I have said for years in up markets bears repeating, rates tend to go up like a rocket and come down like a feather. Lock your rate when you are able.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.25%       Up 0.125

30 year high-balance conforming                       4.375%     Flat

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

Well they say things come in threes and for the Smith household threes have been tires. Last week Leslie had a mishap and needed a new tire. Yesterday the oldest clipped a curb in front of the house and took out a chunk of tire the size of a half-dollar. This morning I am on my merry way to work when I notice the car feels funny, pull up two houses down from ours and see one of my tires is a pancake—with a nail imbedded in it. Thank goodness for AAA, something we have had for 23 years and added our daughter as soon as we could.

 

I see the flats and tire expenses and waiting as the penance I must pay for the joy experienced last Sunday when the Eagles once again overcame underdog status to win their first Super Bowl. Thankfully my daughters were not fast enough with their cell phones to record Dad’s hysteronics as he flapped around the house singing the Eagles fight song and freely expressing his joy at the result of an incredible game. If going through three flat tires in a short period of time is the price of a championship I look forward to a similar cost in June, or perhaps in November, when the Flyers or improbably the Phillies, mimic the Eagles success!

 

Have a great week,

 

Dennis

 

 

 

 

2-2-18: What is “tiered” pricing

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Question of the week: What is “tiered” pricing?

 

Answer:  There are several axioms in economics, the two most well-known are that supply and demand determine prices and that the greater the risk the greater the return. Both of these axioms determine your mortgage interest rate. Rates in general are determined by supply and demand for mortgages as investments, your rate in particular is further determined by risk. When pricing your mortgage we put several factors into the pricing software and it filters through those factors and returns with the price for your particular circumstance.

 

Tiered pricing is used by lenders to adjust for risk, the riskier a loan the higher the rate. What creates risk in a mortgage? Several factors create risk; the most important ones are occupancy, loan to value and credit history as represented by credit score.

 

Tiered pricing comes into play in two different ways. First, the tiers added to a loan price for some of the factors mentioned above, these “add-ons” are standard pricing adjustments on conforming loans from Fannie Mae and Freddie Mac or if a jumbo loan from whomever the investor may be.

 

Let’s take an extreme example. A borrower obtaining a $400,000 loan for the purchase of a condominium as investment with 20% down and a 711 FICO score will have different pricing than someone obtaining a $400,000 loan for the purchase of a condo as their primary residence with 30% down and a FICO score of 798.

 

Taking a look at our non-owner occupied transaction with a condo as the property type. The following add-ons occur to the price of the loan (one point is equivalent to 1% of the loan amount, in this case one point is $4000):

 

Investment property = 3.75 points

Credit Score = 1.25 points

Condominium = 0.75 points

Total add-ons = 5.75 points

 

What if the borrower put down 30% and purchased a condo but for owner occupancy? Because of the change in risk the add-ons, or tiers, change:

 

Credit score = 0.500 points (as opposed to 1.25%)

No add for being a condo

No add for investment

Total add-ons = 0.500 points

 

What if the borrower put down 30% purchased the condo for their primary residence and had a 799 credit score? Essentially there are no add-ons and the price of the loan would be the same if the borrower were purchasing a detached single family home.

 

As you can see in the first scenario with 20% down the cost to the investor is $21,000 more in the cost of the loan than the second scenario where the borrower will have 30% down and live in the property. (5.75 points = $23,000 less 0.50 points or $2,000).

 

Surely an investor is not going to pay $23,000 more in loan fees out of pocket. This is where the second part of tiered pricing comes in. When speaking about mortgages there is a trade off between the cost you can pay and the rate you can pay. Observe:

 

 

 

 

 

The teeter-totter above has the price of the loan on one side and the interest rate on the other side. If you want a lower rate then you will pay a higher price for the loan, if you want a lower price then you pay a higher rate for the loan. In our example above, the investor could get a rate of 4.25% and pay the 5.75 points for the loan, or could get an interest rate of 5.25% and pay only one point for the loan. His payment is higher by $242 per month ($1967 at 4.25% vs. $2209 at 5.25%) if he takes the higher rate, but he saves $19,000 in points.

 

The same scenario on a smaller scale occurs when you are purchasing your home. The you can reduce your cash to close by taking a higher interest rate, the rule of thumb is usually 0.125% in interest rate will reduce your costs by approximately one-half point (0.500%).

 

Using the $400,000 loan example for a primary residence, today our conforming rate for owner occupied purchase with 20% down and 740 credit score at cost of 1.25 points is 4.125%. The payment is $1939 per month and the loan cost is $5000. However, if you take a rate of 4.25% the cost will be 0.75 points, your payment goes up to $1968 ($29 per month) but your cost goes to $3000, a savings of $2000 in cash to close. If you took the lower rate and put the $29 saved per month in a coffee can it would take you almost six years to save the $2000 you would have saved at the time of your transaction had you taken the higher rate. Of course if you did take the higher rate after six years your total cost to purchase the home would be higher by $29 per month.

 

The question you need to answer is do you need the $2000 more today than you need $29 each month in the future?

 

What is tiered pricing? On one-hand it determines the price of your loan based on certain risk factors. On the other hand it allows you to trade more or less cash to close your transaction with a lower or higher monthly payment.

 

Confused? If so please do not hesitate to contact me to discuss your situation and rate options available for your purchase or refinance transaction.

 

Have a question? Ask me!

 

A couple of very important economic data releases this week. On Monday the Bureau of Economic Analysis released personal income, saving and spending data for December as well as the price index. There a bit of good and a bit of not so good in the report, with the good outweighing the not so good in impact on mortgage rates. Incomes increased a solid 0.4% in December against a price increase of only 0.1% (0.2% if food and energy taken out). The increase in income is very positive for economic growth and puts upward pressure on rates. Also putting pressure on rates to go up was a 0.4% increase in consumer spending following a revised 0.8% increase in spending in November from October. As consumer spending is approximately 65-70% of our economy increases point to stronger economic growth. The price index change is lower than expected at this stage of economic growth and a bit of downer in the report, and positive for rates. However, of greater concern was a drop in consumer saving to 2.4%, the lowest rate in thirteen years. While greater consumer spending is helpful for the economy, it is not very helpful if the increase is based on consumers dipping significantly into their savings for their purchases. Overall the report results are not positive for lower mortgage rates.

 

On Wednesday the Fed Open Market Committee—the group that determines what rates the Fed will charge member banks—announced no rate increase in January. This was entirely expected by everyone who follows the Fed and rates so no surprise mean no impact on rates. In the announcement the Fed indicated it feels inflation will increase to 2% at some point this year and stabilize at that level. “Solid” was how the FOMC described employment and business spending.  The announcement gave no reason to expect the Fed will not continue with its plan to raise rates three times in 2018, and the expectation is for a 0.25% increase in each hike. Should inflation and employment heat up further we could see a fourth hike added this year, or perhaps one of the hikes being 0.50% instead of 0.25%.

 

Strong, solid, very positive, all describe the employment report released this morning by the Labor Department. Non-farm payrolls increased 200,000 in January, following a revised 160,000 increase in December. The unemployment level remains at 4.1% and the participation rate is level at 62.7%. Average hourly earnings were another sign of strength in employment showing a 0.3% increase for the month and up 2.9% from January 2017. With the price index increasing 1.7% the gap between hourly pay increases and higher prices being over 1% is certainly good news for workers as their paychecks go further this year than last. The soft spot in the report is a decline in the average workweek from 34.5 hours to 34.3 hours. This is the first decline in sometime for the average workweek so it could be a one-off due to winter weather that impacted most of the country in January, we will see what next month’s report has to report to see if this is a negative and concerning trend. Overall the strength of new hires and higher wages are very positive and negative for mortgage rates.

 

Rates for Friday February 2, 2018: Conforming rates increase for the second week in a row and third time in four weeks and high-balance rates are up for the fourth Friday in a row. The positive economic news and growing momentum will continue to put upward pressure on rates. Lock in your rate when you can remains the advice from this mortgage expert.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.1215%       Up 0.125

30 year high-balance conforming                       4.375%        Up 0.125%

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Two weeks ago I wrote in this space how excited I was that the Philadelphia Eagles were playing in the NFC Championship. That excitement is more than doubled as they play in the Super Bowl on Sunday. This is their third trip to the Super Bowl and they are looking to win it for the first time (losing 27-10 to the Raiders in Super Bowl XV following 1980 season and 24-21 in Super Bowl XXXIX to Tom Brady and the Patriots following the 2004 season). The last time the Eagles won a championship was in 1960, so the fans could be described as long-suffering.

 

As is my hope with all big games, and little ones, my hope is that it is well played and determined not by one team playing poorly and making mistakes but by one team playing exceptionally well and deserving the victory. My bigger hope is that victorious team has millions of fans signing their fight song well into Sunday night. The same song that has been my ringtone for the past several weeks.

 

Fly Eagles Fly!

 

Dennis

1-26-18: The tenant is still in the property, should we close

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Question of the week: The tenant is still in the property, should we close?

 

Answer:  With real estate values up many investors are selling properties they have been holding onto and renting for several years. As a result we have some issues pop-up on home sale transactions that do not present themselves when sellers are owner-occupants.

 

Over the weekend I got a call from clients who had just finished their final walk-through on a condo unit they were purchasing for mom and we were scheduled to fund and close on Monday.

 

The sellers had retained the condo as a rental years ago when they had purchased a new home. As part of the sales contract the seller agreed to have the property vacated by the tenant at least 10 days before closing. The buyers were calling because the tenant, and a fair amount of his possessions, was still in the property.

 

“What should we do?”

 

Don’t close.

 

I let them know that as soon as we concluded the call I would be notifying my office, the escrow officer and agents that because the tenant and his possessions were still in the property that we would not be funding on Monday unless the buyers contacted me to let me know the property was vacant.

 

Why?

 

Once you take ownership of the property the tenant becomes your tenant. And your problem. If the tenant decides to stay a while longer, or does not remove his possessions, you as a landlord are very restricted as to actions you may take due to tenant’s rights in the State of California. To remove the tenant you would have to go through the formal eviction process, which includes many filings and trips to court and if necessary engaging the county sheriff’s office to force eviction. Should the tenant fight the eviction and employ many of the legal delays available it can take up to a year to evict the tenant. I will not delve into the possible condition of the property once the tenant does vacate, voluntarily or involuntarily.

 

My advice to the client was to not proceed with funding the loan and closing the property until they made inspection to show that the tenant was no longer in the property or any of his possessions. Once that was confirmed they needed to change the locks as well as the code on the garage door opener to prevent his being able to re-enter the property.

 

On Monday morning the client called and said the tenant was out but some possessions were on the other side of a shared garage. Since the garage was shared with another unit, and that unit is vacant, my advice was to not close until those possessions were removed as it could still be construed as possession was with the tenant.

 

That evening the buyer called and let me know that the seller had removed the possessions, changed the locks and re-coded the garage door opener.

 

We funded the loan and closed on Tuesday on a vacant property that became full possession of the new owners.

 

Over the years I have been involved in a few nightmare scenarios involving our clients purchasing properties they intend to occupy with tenants still in residence because they closed with the tenants in possession. In every instance the buyers took the word of the seller, the tenant or the agent(s) that the tenant would be out of the property by closing. In one transaction the tenant left a few days after closing, but not before taking the appliances that were included in the sale. In another the tenant was still in the property one month after close and a pay-off was negotiated whereby the new owner gave the tenant a few thousand dollars to leave, giving him a cashier’s check in the street once the property was verified to be empty; the locksmith was there as well changing the locks while the transaction took place.

 

These are not the normal experiences of purchasing a home that has been used as a rental, however they do occur. If you are purchasing a home, or property, and you want it vacant at the time of closing, do not close until you verify it is vacant. No excuses, no promises, you want the property vacant when you take possession and once you do change all the locks and codes to enter the property.

 

If anyone wants an idea of the rights of tenants in California I suggest getting “Pacific Heights” from Netflix or Amazon. A bit extreme but…..

 

Have a question? Ask me!

 

Gross Domestic Product data for the 4th quarter of 2017 were released today and the report is positive once you dig into the data. Overall the economy grew at 2.6%, below the expectations of 3% or greater growth, and lower than the 3.2% growth in the 3rd quarter. Diving into the numbers GDP growth was restrained due to net exports which showed a $652 billion deficit (America imported $652 billion more in goods than it exported). This trade deficit pulled back what would have been a very strong GDP reading mostly due to the strongest quarter of consumer spending since 2015, up 3.8% from the prior quarter. With consumer spending being approximately 65-70% of our economy strong spending by consumers drives a strong economy. Another positive in the report was 2.4% increase in prices, also indicating economic strength. Just the headline number has a neutral impact on mortgage rates, digging into the numbers showing the strength of consumer activity is negative on mortgage rates and puts upward pressure on them in the short and long term.

 

Rates for Friday January 26, 2018: Rates bump up this week, and the conforming rate hits 4% for the first time since the last week of March 2017. With positive economic news we can expect more upward pressure on rates. If you are waiting for rates to dip back down you may have missed the opportunity. Lock your rate when you can!

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.00%       Up 0.125

30 year high-balance conforming                       4.25%        Up 0.125%

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Throwback night for Leslie and I as we take the girls to the Honda Center for the Totally ‘80’s concert featuring many bands we listened to, well in the ‘80’s. Everyone is excited for the show and last night there was some impromptu warbling of some of the songs we may hear.

 

You know you are getting old when the songs you listened to after college, well after, are being played on the “Oldies” stations!

 

Have a great week,

 

Dennis

 

 

 

 

1-19-18: What are supplemental taxes

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Question of the week: What are supplemental taxes?

 

Answer:  This is a question many buyers ask, whether first time buyers or someone purchasing for the first time in a long time.

 

Before we talk about supplemental property taxes we need to review property taxes. To keep this discussion simple, we are only addressing taxes when a home is purchased.

 

Your property taxes are established when you purchase your home and are based upon the purchase price. The base tax rate in California is 1% of the purchase price. On top of the 1% are additional assessments as established by the voters or elected officials in the county and/or city where the property is located. For instance in Long Beach there are additional taxes assessed for water district, the county for parks, school district and community college district among other assessments.

 

The rule of thumb for property taxes is the amount is 1.25% of the purchase price of the property. If you purchase a property for $500,000 we estimate your taxes to be $6250 per year.

 

In California, the fiscal year is July 1st to June 30th. Tax bills are mailed in October with the first half taxes due by December 10th and the second half taxes due by April 10th. With our $500,000 price example, you would need to pay $3,125 in December and $3,125 in April.

 

If you are purchasing a home and close on the last day of February the escrow company make sure the second half taxes, due by April 10th, are paid as part of the closing. The taxes that will be paid will be those currently due; i.e. the current owner’s tax bill. As well the escrow company will collect from you and reimburse the seller for four months of taxes since you will own the property the final four months of the tax year—March, April, May and June.

 

On the property you are purchasing for $500,000 that will have property taxes of $6,250 the current owner’s annual taxes at the time of the sale are $3,850 per year. At closing you will be charged $1283.33 to cover the four months between your purchasing the property and the end of the tax year on June 30th.

 

In October your property tax bill will state that you owe a total of $3,850, half due by December 10th and half by April 10th.

 

But…your tax basis is supposed to be $6250, why is your tax bill smaller? Because if you purchase your property between January and May the prior owner’s property taxes will continue through the next fiscal year.

 

You will also receive a supplemental tax bill in the amount of $2400 with half due by December 10th and half by April 10th. The supplemental taxes cover the difference between the amount you were billed based on the prior owner’s tax obligation and your tax obligation based upon the transfer price.

 

If you are paying your taxes directly this causes little difficulty, you are paying the total amount that is owed, just off of two different bills, the regular tax bill and the supplemental.

 

If you have your taxes impounded as part of your monthly mortgage payment then it gets a little tricky. Your lender will be collecting every month based upon what your taxes should be, $520.83 per month, and will be prepared to pay $3,250 in December and $3,250 in April. However, in October the lender will receive a tax bill totaling $3,850 with two installments due.

 

This is where it can, and does, get tricky and one reason I encourage people to avoid having their taxes and insurance impounded and paid by the lender if it is an option. In this scenario, with an impound account, you will have paid your lender $520.83 per month based on what tax obligation will be, and then your lender will pay the taxes owed on the tax bill. The result will be a balance of the excess between what was collected and what was paid. At some point the lender will refund this money to you, as they must by law.

 

However, the refund will most likely come after you will need to pay your supplemental tax bill totaling $2400. If you are impounded and have paid the full amount to the lender for the taxes why is the lender not paying the supplemental tax bill? They have the money to pay it.

 

Because the county assessor does not send the supplemental tax bill to your lender, and you are responsible for the payment. Essentially you will end up paying the supplemental amount twice, once to the lender—which eventually gets refunded—and once to the county.

 

If you have an impound account there is the possibility that your payments will be adjusted a few times over the following year or more. Because the tax bill sent to the lender was significantly less than the amount collected, the lenders automated billing process may reduce the amount owed every month as part of the tax collection and will send you a notice to this effect.

 

It is very important if you do get this notice that you contact the lender and inform them that you do not want your impound collection to be lowered due to the one-time tax bill that was paid at the prior owner’s tax rate, because if you do then you will be underpaid when the next tax bill is sent and the lender will end up sending you a notice that the account is short and your payment must be increased to account not only for the real tax amount due but the shortage created by them adjusting their collections.

 

Confusing isn’t it? This happens not infrequently as the lender tries to catch up to the actual taxes owed. So if you get a notice after the first tax bills have been paid by the lender, and you have paid your supplemental taxes that significantly lowers your tax collection for your impound account contact your lender immediately and have them adjust the collection back to the necessary amount.

 

As with any mortgage or real estate related question or problem you can contact me if you are having an issue regarding the supplemental taxes or impound account I can help walk you through the process and steps to take.

 

Have a question? Ask me!

 

Rates for Friday January 19, 2018: Not a lot of economic news this week to move rates, however there was movement up on high-balance and upward pressure on conforming due to the gains in the stock markets. As I write this after noon on Friday the bond markets are off (higher rates) due to uncertainty over the potential shutdown of the Federal government. Now is not the time to float your rate, if you are in position to lock in your rate through your closing period I suggest you lock.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.875%       Flat

30 year high-balance conforming                       4.125%        Up 0.125%

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

 

I had an interesting childhood moving around (three states and a foreign country through high school), as a result I have what some may consider odd allegiances for sports—basically the Oklahoma Sooners due to my native state and Philadelphia sports as that is where we moved when we left Oklahoma. Being a fan of Philly sports is a history of disappointment most of the time with some seasons of hope.

 

As a result of my allegiances, I have been somewhat excited through December as first the Sooners had the opportunity to play for the national championship in college football and now the Eagles are in position to go to the Super Bowl for the first time since 2005. The Eagles (or Iggles in local parlance) lost that game to Tom Brady and the Patriots who won their second Super Bowl in a row and third in four years. I may be asking for it, but I am hoping not only that the Eagles beat the Vikings this weekend, but they have a chance to upset the Patriots, prevent them from repeating history by winning their second in a row and third in four years.

 

I know all of you are with me on this!

 

Have a great week,

 

Dennis

Fly Eagles Fly

 

 

 

1-5-18: With the new tax laws should I keep my Home Equity Line of Credit

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Question of the week: With the new tax laws should I keep my Home Equity Line of Credit?

 

Answer:  With the calendar turning to 2018 we are now under the new tax codes signed into law by President Trump in December. There is still plenty of confusion about how the IRS will treat many of the changes, among them is the interest paid by home owners if they have a Home Equity Line of Credit (HELOC) and if it is deductible on the federal tax return. Reading through many articles and communicating with tax professionals, lenders that specialize in HELOCs and other research I am not entirely clear on how HELOC interest will be treated moving forward—and until the IRS issues a clear ruling I don’t think anyone else is either.

 

Some people may use the deduction, or lack thereof, to determine how they wish to move forward with their current HELOC, or to obtain one for purposes of home improvement, debt consolidation, college costs, etc. Here are some items to consider if you have, or are considering, a HELOC.

 

DISCLAIMER: I am not a tax professional, if you have a HELOC please consult with your tax preparer regarding the impact it has on your taxes.

 

There is a lot of information out that none of the interest on your HELOC will be deductible, regardless of when you obtained it or how the funds were spent (home improvement, debt consolidation, medical expenses, college, etc). Under this line of reasoning, if you have a $100,000 HELOC you obtained when you purchased the home in 2011, the interest is no longer deductible.

 

However, there are some “experts” that are stating that if your HELOC was used for the acquisition of your primary, or second/vacation home, then the interest paid on the HELOC is still deductible. These are contrary opinions, and if you have a HELOC that you have only used to purchase your home it obviously has an impact on your tax preparation in the future. If acquisition HELOCs will remain deductible then you are fine and continue as you have in the past, if they are not then you will want to meet with your tax and mortgage professionals to determine your best course of action moving forward.

 

If you obtained a HELOC to put in a pool, remodel your home or do other home improvements, in the past you probably had an interest deduction. Under the new law, based on almost everything I have read and heard, you will no longer be able to deduct that interest from your federal taxes.

 

If you have a HELOC that you used for medical expenses, college tuition and/or debt consolidation you will also not be able to deduct the interest moving forward.

 

Back to our question of the week, if you have a HELOC should you keep it? Especially if the interest you pay is no longer deductible?

 

As with most questions involving mortgages and personal finances, there is no standard answer for everyone. The factors you need to consider are:

 

How much is the tax deduction you are losing? If you have a balance of $50,000 and are paying $2500 per year in interest, is losing that deduction costing you a lot of money?

 

What are your options to pay off the HELOC? Do you have cash or assets you can liquidate to pay off the balance? If you do what is your trade off? What has been your return on investment for those assets and what is the rate on your HELOC? Are you making more in interest and/or dividend payments than you are paying for the HELOC?

 

Or perhaps you pay off the HELOC with a refinance of your primary mortgage and consolidate the two loans. Once again, we do the math, what is your current rate on your primary mortgage, what are your payments, what is the value of your home and the total balances we would be consolidating? And finally, and very importantly, what will be your new rate of interest and monthly payment?

 

One big factor to consider if you have a HELOC and are considering paying off or refinancing to consolidate the payment is your future interest rates. Almost every HELOC has its interest rate tied to the prime rate. The prime rate tends to move up and down when the Federal Reserve moves its lending rate up and down. In the past year the Fed has hiked its rates three times, each time 0.25% (one-quarter of one percent), resulting in the prime rate also going up 0.25%  three times for a total of 0.75% (three-quarters of one percent) in the past year. If you had a $100,000 HELOC in December 2016 and retained the same balance through the year your interest payment at the end of 2017 was $62.50 per month ($750 per year) more. The Fed has announced it intends to increase rates three more times in 2018, which will increase the rate on your HELOC another 0.75%.

 

With increases in the prime rate known to be coming in 2018, does it make sense to fix the rate on your HELOC balance and consolidate it with your primary loan?

 

When making a decision regarding your HELOC keep in mind the tax laws started on Monday, and the longer you wait to make that decision the more impact it could have on your tax returns for 2018 that you will file in 2019.

 

When you meet with your tax professional to prepare your 2017 taxes if you have a HELOC ask for advice about your interest deduction options for 2018. And before you meet with your tax professional do not hesitate to give me a call to discuss your options if refinancing and consolidating your HELOC is an option for you.

 

Should you keep your HELOC? Maybe, maybe not, but do your research and explore your options, contact me to discuss some of those options.

 

Have a question? Ask me!

 

The final employment report for 2017 was released this week showing the economy added 148,000 jobs in December and the unemployment rate was steady at 4.1%. The total hires in December were down from November and below expectations of those economists polled. A positive news in the report was a 0.3% increase hourly earnings from December, up 2.5% from December 2016. With inflation running below 2%, average wages increasing more than 2% is positive for workers. Within the report there was strength in construction and manufacturing hires and there are signs that scarcity of skilled labor in these sectors could be hindering growth. Overall the news is mortgage rate neutral.

 

Rates for Friday January 5, 2018: Ending our first week of the new year rates continue the steady pattern of the last few months with no change from last Friday’s rates. Conforming rates start 2018 one-quarter of one percent below (0.25%) what they were the first Friday on 2017.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.75%           Flat

30 year high-balance conforming                   3.875%        Flat

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

Today’s WR&MU is being composed from Palm Desert where the Smith family has been compounded for the week. I will admit to feeling no guilt as we have enjoyed very enjoyable weather, getting in a few rounds of golf and spells by the pool, as other parts of the country are digging out of their front doors and wondering which mound of snow in the street is their car. California is not flawless, with perhaps the exception of weather throughout the year and especially weeks like this.

 

I hope everyone had a wonderful New Year’s celebration and wish you all a very healthy and prosperous 2018!

 

Dennis

 

 

 

10-27-17: Should I use a “piggy-back” to buy my new home?

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Question of the week:  Should I use a “piggy-back” to buy my new home?

 

Answer:  We start our answer to the question with a question many of you may be asking, “what is a ‘piggy-back’?”

 

Last week we discussed mortgage insurance and how conventional mortgages require mortgage insurance for loans that are over 80% loan-to-value. If you are buying a home for $600,000 (the median price for a home in LA County) and getting a mortgage for more than $480,000 then you need mortgage insurance.

 

Using a piggy-back enables you to put less than 20% down and avoid mortgage insurance, because the piggy-back is a second loan that bridges the amount between your down payment and your mortgage of 80% of the purchase price.

 

For example, you want to purchase a home for $600,000 but you only have $60,000 down. Traditionally you would get a mortgage for $540,000 and pay mortgage insurance. Using a piggy-back you would put down $60,000 and get a 2nd loan for $60,000 and have your primary loan be $480,000, which is 80% of the purchase price and therefore you do not need mortgage insurance.

 

Not all, but almost all, piggy-back mortgages are Home Equity Lines of Credit (HELOC). What is a HELOC? It is very similar to a credit card, you have a maximum credit limit and you only make payments on the balance you have outstanding. The interest rate on a HELOC is an adjustable tied to the prime rate goes up and down so will the rate on your HELOC.

 

Another feature of many HELOCs is that the minimum payment is interest only, which makes them very enticing as the interest payment can be very low, however you are not paying down any of the outstanding principal which becomes an issue in later years when you have a very large balance that has to be paid off.

 

Since the HELOC is used to purchase the home the interest paid on the loan is tax deductible under the current tax code. This is a positive for many families, especially those who are unable to deduct mortgage insurance premiums.

 

As you can see there are some positive aspects to using a HELOC to purchase your new home, but back to our question of the week: should you use a HELOC to buy your home?

 

Let’s compare getting a HELOC with using mortgage insurance to purchase the median priced home in LA County of $600,000 with 10% down and you have a credit score of 740.

 

Let’s start with purchasing with a HELOC. You will have a primary mortgage of $480,000 (80% of purchase price) and a HELOC of $60,000.  The rate on the primary mortgage this morning is 4.00%, the average rate on a HELOC up to 90% total loan to value (combined 80% primary plus 10% HELOC) is Prime Rate plus 2%, today prime is 4.25% so the rate would be 6.25%.

 

Payment on the primary mortgage is $2292 per month.

The minimum payment on the HELOC is interest only which would be $313 per month*.

 

The minimum payment you must make is $2605 per month, until the prime rate increases and then your payment will increase as well.

 

Last year the prime rate was 3.5%, your rate would have been 5.5% for a minimum payment of $275 per month, if the rate increases another three-quarters of a percent in the next year your rate will increase to 8.00% for a payment of $400 per month.

 

*Most HELOCs are for twenty years, if you want to amortize the payment and include principal the payment at 6.25% would be $439 until the rate changes.

 

If you purchase using mortgage insurance your primary mortgage will be $540,000 at a rate of 3.875%** and your mortgage insurance premium will be 0.41% of the loan amount.

 

Primary mortgage payment is $2539 per month.

Your mortgage insurance premium is $185 per month.

 

Your total payment is $2724 per month as long as you have mortgage insurance, $119 more per month than if you used a HELOC to purchase the home and paid the minimum payment. If you pay additional payments on the HELOC to pay down the principal then you payment purchasing with a HELOC would be higher. As well when the prime rate increases in the future your “savings” with the HELOC will decline.

 

** It seems counter-intuitive that putting 20% down has a higher rate than putting 10%, however rates are lower for mortgages with mortgage insurance than those without as the lenders are insured for losses should you default. If you default on a mortgage that is 80% of the value of the property the lender will lose 10-20% of the loan amount. If you have mortgage insurance on a 90% loan the lender is covered on losses up to 25% of the value of the mortgage. Even though the risk of loss may be higher with 10% down, the amount of loss to the lender should you go to foreclosure is less than if you had mortgage insurance.

 

Note the statement above, “as long as you have mortgage insurance…” Those who read last week’s WR&MU will recall that after you make 24 consecutive payments on time and can show you have 20% equity in the property then you can have your mortgage insurance premium released. So between your mortgage principal declining through your payments and the market increasing you let’s assume you will have that 20% in four years (had you purchased the median priced home in LA County in 2015 you would be able to remove your MI this year) after purchasing your property. At that time you go through the process and have your MI payment removed, saving $185 per month, or $2220 per year.

 

The only way to remove your HELOC payment is to pay it off, and unless you have the ability to make very large payments over the years it will likely take you quite some time to pay off the loan.

 

Depending on your financial situation, and ability to pay down/off the HELOC rather quickly through sale of another property, large bonuses, etc, for most families the long term best option is to purchase their home using mortgage insurance that will have fixed payments, and the ability to remove the MI premium payments in the future, as opposed to a large equity line tied to a rate, the prime rate, that will be going up over the next few years.

 

Please call me to discuss your situation and determine the best way for you to purchase your new home. And if you have a HELOC, or mortgage insurance, from a  previous transaction call me to see what your options are to possibly lower your monthly payments, or keep them the same and fix your total monthly payment.

 

Have a question? Ask me!

 

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

 

Economic data released this week for September shows strength building. Durable goods orders in September showed a nice gain, even trying to account for Hurricane Harvey. Showing even more strength was the initial Gross Domestic Product numbers for the 3rd Quarter, increasing 3.0%, a strong following from the 2nd Quarter’s 3.1% growth. Inside the numbers we saw strong growth in consumer spending and durable goods purchases-led by vehicle replacement post hurricane. The soft spot was residential real estate, which has been supporting economic growth for the past several years. Inflation was at 2.2% annualized with is within the Fed’s target range. Overall the report is fairly rate unfriendly and puts upward pressure on rates for the long term.

 

Rates for Friday October 27, 2017: We see the conforming and high-balance conforming rates un-linked this week. For the first time in almost a year the separation between the two rates is greater than one-eighth of one percent (0.125%) as the high-balance rate increased an eighth of a percent this week and the conforming rate remains flat. The last time we saw the one-quarter percent gap between the two mortgages was the week ending November 11, 2016 when we saw rates increase three-quarters of a percent in six weeks following the election. There is upward pressure on rates, the advice is to lock when you can.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.75%           Flat

30 year high-balance conforming                   4.00%          Up 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

 

Well baseball fans are getting a treat, at least two treats so far with the first two games of the World Series, I am hoping we get five more similarly exciting games.

 

I will go out on a limb and presume that many (most? all?) of your households are like ours and the Halloween candy purchased in preparation for Tuesday evening has been thoroughly tested and perhaps the testing has gone so well as to require another purchase of candy for the witches, princesses, firefighter and bumble-bees on Tuesday night. Halloween candy, the official start to the end of the year belt-tolerance limit as we flow from the candy to Thanksgiving to Christmas and the non-stop treats, pies, cakes, etc for the next sixty plus days.

 

Stay strong, say no to yourself and Think Blue,

 

Dennis

 

 

 

 

Weekly Rate & Market Update 11-3-17: Should we be worried about the new tax plan that will cut the mortgage deduction?

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 Question of the week:  Should we be worried about the new tax plan that will cut the mortgage deduction?

 

Answer:  With the biggest tax reform plan working its way through the House of Representatives and the Senate it is no surprise that various aspects of what have been released and talked about so far have been a hot conversation topic. Last week at meeting with a group of professionals from family law attorneys to CPAs to business owners we discussed various parts of what had been floated through the media for almost an hour. The only consensus was that we were debating what we don’t know since until both houses in Congress agree on a bill, pass it and present it to the President everything is negotiable.

 

That said….the two features of the plan presented to the House of Representatives that impacts the housing markets are deductions for mortgage interest and property taxes; under the plan released this week both would be reduced from the current tax code allowable deductions.

 

Currently if you own a home with a mortgage you have the opportunity to deduct the interest paid on the mortgage and property taxes. “Opportunity” basically means there are limitations on the deductions. First, in order to claim deductions for property taxes and mortgage interest on your primary (and possible second/vacation home) residence you must itemize your deductions and they must exceed the standard deduction given to tax filers (for married couples $12,700 in 2017). If you meet these criteria then you can deduct all property taxes paid to the local tax authority. Second, a married couple can deduct interest paid on a mortgage used to acquire, build or substantially improve the property up to one million dollars of mortgage liens. For example if you own a home with a $1.3 million mortgage at 4% interest you can deduct $40,000 in interest paid, not the full $52,000 you actually paid in interest.

 

The current plan that will be debated in the House and put through many separate committees before a final bill is presented for a vote increases the standard deduction to $24,000 for married couples and limits the mortgage interest deduction to interest paid on mortgages up to $500,000 and the property tax deduction to a total of $10,000.

 

What does this mean in plain English and simple math?

 

Before we do some math, let’s answer the question: What is a tax deduction? Many people confuse a tax deduction with a tax credit, the difference is that deduction is an amount that reduces your taxable income and a credit is an amount that reduces your tax obligation.

 

Note I am not a tax professional, all examples are very fundamental calculations and used for comparative purposes only.

 

For example if you and your spouse make $80,000 and file your taxes with the standard deduction of $12,700 for 2017. Before the deduction your tax bracket is the 25% tier based on your $80,000 taxable income. After the tax bracket your taxable income drops to $67,300, and your top out at the 15% tax bracket. The deduction saves you approximately $2300 in federal income tax from about $11,500 without any deduction to approximately $9200 after the standard deduction is applied.

 

The deduction lowers your income, which can change your upper tax bracket and lowers your tax liability.

 

A tax credit is applied to your income tax liability directly after your taxes are calculated. Using the same couple above, during the year they installed energy efficient rated windows for a total of $4000. The federal tax code allows a credit of 10% of qualified windows installed on a primary residence, up to a maximum of $200. This lowers the tax obligation from about $9200 to $9000—the credit results in a direct reduction of taxes owed.

 

Back to the tax proposal.

 

Currently if you have a mortgage used to purchase your home with a balance of $600,000 and a rate of 4% you will pay approximately $24,000 in mortgage interest. Since this exceed the standard deduction for a married couple, is a mortgage on your primary residence and the mortgage is under $1 million you can deduct the $24,000 from your income when you file your taxes.

 

To qualify for the $600,000 you may make around $140,000 as a couple. Taking the interest deduction you taxable income drops from $140,000 to $116,000. You are still in the 25% tax bracket, absent any other deductions, so you save 25% of $24,000 in taxes, or $6,000.

 

Under the new proposal you will only be able to deduct the interest on the first $500,000 of the mortgage, $20,000, so you lose $4000 in deductions from your income. In this scenario your tax obligation will drop $5000 instead of $6000 so the tax proposal as written costs you $1000 more in taxes for the year.

 

Similar calculations can be made for property taxes if your annual tax bill exceeds the proposed $10,000 limit.

 

A couple of points regarding this discussion. First, tax reform is constant in our nation’s history. Every President and Congress from 1789 has passed changes to the tax code, some small and some quite major. Any changes in the tax code made by the current 115th Congress and signed into law by President Trump will be subject to future changes as a result of elections changing members of Congress and residents of the White House.

 

Second, at this stage in the process everything is negotiable. What is in the tax plan today may not be in the tax plan tomorrow. What items in the plan are in there for purposes of negotiation? If some members of Congress want the mortgage interest and property tax deductions levels to increase what are they willing to give up to get their way? Increase the proposed corporate tax rate? Change the elimination of the estate tax to a higher level of tax exemption?

 

Third, in California we look at taxes in a whole different light than most of the country for a couple of reasons. Our property values are significantly higher than most of the country so our mortgages are higher and our property taxes are higher in dollars paid (several states have higher percentage of property taxes) so limiting those deduction will impact Californians more than those who own homes in Oklahoma, Utah or Kentucky. So, while collectively we may be against the reduction in the deduction limits for interest and property taxes in California, through much of the country the limitations have little to no impact and is more than offset by the increase in the standard deduction. We are represented by 53 Representatives (12% of the total) and two Senators (2% of the total), and while it is the largest state contingent in Congress it still represents just 12% of the population and many Representatives and Senators representing the 88% of the population see more advantages to their constituents than detriments.

 

Taxes are the ultimate political tool and tax reform is only political. As the plan works through Congress I am going to assume that the mortgage interest and property taxes proposals will be amended—maybe trade a higher mortgage deduction for eliminating the property tax deduction, or raise both limits and trade for something else, or…..the Republican majority cannot keep the party members together and the plan collapses completely and we see no changes to the tax code.

 

At this point it is all speculation, I hope I have been able to present a fairly clear and understandable example of the potential impact of the proposed changes to the tax plan that could impact California homeowners that you can use to sort out future proposals and potential personal impact.

 

Have a question? Ask me!

 

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

 

The first week of the month means labor data. October saw Americans earning more and spending more—both good news for the economy—but prices are stagnant—which is not great news. Workers saw income increase 0.4% for the month and led by a surge in durable good spending due to hurricanes increased spending by 1% from September. Prices were flat going up only 0.1% for the month and 1.3% from last October, well below the Fed’s inflation rate. The news is mixed for mortgage rates as the stronger earnings and spending would tend to push rates up but the low prices keep rates down.

 

More workers, a lot more, is the news from the Labor Department’s October report. Total payrolls increased by 261,000 workers, 252,000 in the private sector. This is a very large increase, however much of it is the result of those displaced by hurricanes going back to work. For example, restaurants lost 98,000 workers in September and gained 89,000 in October. There was a dark cloud in the report and that is wages not increasing for the month. Overall the report is mortgage rate neutral.

 

Big news for the Federal Reserve yesterday when Trump nominated Jerome Powell to replace Fed chief Janet Yellen when her term expires in February. Powell is considered a moderate and unlikely to change any current policies of the Federal Reserve is confirmed for the post by the Senate.

 

Rates for Friday November 3, 2017: Rates are flat for conforming and dip back down on high balance loans after ticking up last week. All eyes, ears and noses are focused on Congress and the debates, negotiations and horse-trading over the tax bill. Depending on what moves through the process investors may react by fleeing to safety, rates drop, or loading up on equities in private companies, rates increase. Stay tuned, there should be plenty for office water cooler and weekend barbecue discussions.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.75%           Flat

30 year high-balance conforming                   3.875%        Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

What was more depressing for you, the outcome of the Game 7 or the amount of candy left over in your bowl for Trick-or-Treaters on Tuesday night? My disappointment was less in the outcome of the game on Tuesday than the lack of a great game that kept us on the edge of our seats all night. Congratulations to the Astros. Two things for baseball fans, right now every team is tied for first place, including my Phillies, and its only 102 until pitchers and catchers begin to report for Spring Training!

 

Have a great week,

 

Dennis

 

 

 

Weekly Rate & Market Update 11-10-17: Do you know someone who can help me with…?

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Question of the week:  Do you know someone who can help me with…?

Answer:  This is a question I am asked not infrequently from people looking for some type of professional advice or representation, and the answer is, Yes. Yes, I do know someone who can help you with…

One of the benefits of being in this industry for thirty years is the number of different types of transactions I have been involved in.  As well I am, and have been, active in several organizations that gives me the opportunity to meet and work with professionals in several different disciplines, and within those specific specialties.

Have you created your trust yet to protect your assets and family? I know several attorneys who specialize in this type of work.

Do you have an issue with real estate you own that requires some legal advice? I know specialists in real estate law.

Own your own company and becoming less satisfied with your accounting and tax preparation? I know CPAs who specialize in small, medium or large businesses who can help you get back on track.

You are the executor of an estate and need valuations for settlement and taxes? From real estate appraisers to professional evaluation experts I can provide you with someone to speak to.

Having HR problems at your work, either as employer or employee? I know several people with different focuses on human relations and employment that may be able to assist you.

You were involved in an accident, or someone broke a bone climbing your fence, or you have had some other incident occur in which you need legal representation? Whether as defendant or plaintiff you may find one of the attorneys I know that specialize in civil or criminal law able to help you with your incident.

You have received that very unwelcome communication from the IRS or State Franchise Tax board notifying you of an audit and your accountant is not an audit specialist? I can provide you with recommendations for someone who is and can represent you to the tax agency.

Unfortunately, all relationships do not work out, if this is the case and you need to speak to someone about a divorce or legal separation, and possibly represent you, I know several attorneys in this area as well.

And of course, through the years I have come to know, trust and respect several real estate professionals who can represent you if you are thinking about buying or selling real estate.

You know a guy, me, who knows several guys and gals from a wide range of professions and specialties. If I do not have personal knowledge of someone and their capabilities I definitely know someone who does and can provide a very good recommendation.

From financial to legal advice and assistance if you are in need of a quality professional please do not hesitate to contact me and ask for a referral to someone who may be able to assist you. After all, you know a guy so use him!

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Rates for Friday November 10, 2017: Regular readers of the WR&MU will note a lack of economic news impacting mortgage rates this week, the dearth of data this week will be more than made up for next week as we have important data released on inflation and spending. With the lack of major news this week rates are flat, with the conforming rate having no change for four weeks. Next week’s data however could put upward pressure on rates so if you are in a position to lock I suggest you lock.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.75%           Flat

30 year high-balance conforming                    3.875%        Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

Gratitude and respect for the Veterans out there who have served, or are serving, our nation. While we recognize our Veterans in N

ovember every year, it is important that those in need get assistance throughout the year. One organization that has done exceptional work helping those Veterans in need is the Paralyzed Veterans of American. PVA has been in existence for over seventy years and has a wide range of services they provide to not only help those currently in need but to fund research and advocate for future needs of our Veterans.

If you are able and willing you can click here to make a donation to the Paralyzed Veterans of America, there is also an option to make your gift in someone’s honor, a nice way to let a Veteran you know and respect that you are thinking of them and their service.

Have a great week,

Dennis