11-16-18 What was the cost of waiting?

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

 

 Answer:  Over the past few years we had a lot of clients who were waiting to buy a new home because they felt the market would correct at some point and they could purchase the home they wanted for less money. About once a year for the past few years our question of the week has been, “what is the cost of waiting.”

 

On March 2, 2018, this was the question of the week and in my answer the worst case scenario I presented, with highest cost increase and highest interest rate, has come to pass.

 

Instead of creating my own sales prices for the answer to this week’s question, I will use the median home price for Los Angeles County as published by the California Association of Realtors.

 

What was the cost of waiting to purchase a home from September 2017 to September 2018?

 

In September 2017, the median priced home in the county was $606,110, in September 2018 the median price rose to $634,680, and increase of 4.7%. During this same time the interest rate for a 30 year fixed rate loan for borrower with a 740 FICO score rose from 3.75% to 4.75% for the loan amounts needed to purchase the median priced home with 20% down.

 

With the prices and rates climbing it follows that the mortgage payment also increases. With the 20% down payment on the median price the loan amount in September 2017 was $484,890, in 2018 the loan amount rose to $507,940. As a result, the monthly payment for the median home in 2017 was $2245, this year that payment is $2650 per month, an increase of $405 per month, or about 18%.

 

Long-time readers of the WR&MU know the mortgage industry used debt-to-income (DTI) ratios to qualify income for mortgage applicants. The DTI is calculated by adding up the applied for housing payment (mortgage principal and interest, property taxes, homeowner’s insurance, homeowners’ association if applicable, aka PITI) plus credit obligations (credit cards, auto and student loans, alimony and parental support payments, etc). Once the obligations are added together that number is divided by your gross income and the result is your debt-to-income ratio. Example: your new house payment is $3000 per month, you have $1000 per month in revolving debt and car loans for a total of $4000 per month. Your salary is $10,000 per month. Divide the $4000 in obligations and house payment by your $10,000 per month salary and your DTI is 40%.

 

The catchall rule of thumb for most homebuyers is that the house payment, PITI, should be around 35% of your gross income. Why 35%? Because when we add in your other credit obligations we do not want to exceed 45% of your gross income for most loan programs and many households have about 10% of their income going to other debt obligations.

 

Using the 35% rule of thumb, how much more income did you need to qualify for the median home in September 2018 from September 2017?

 

Including estimates for taxes and insurance the PITI for the median home in 2017 with 20%, a 30-year fixed rate of 3.75% was $2998 per month. Divide the PITI by 35% and we see that you needed income of about $8550 per month ($102,600 per year) to qualify for the median September 2017 home.

 

The September 2018 median priced home in LA County, also with 20% down but with a rate of 4.75% for a 30-year fixed rate, had PITI of $3438 per month. Still using 35% as the factor for calculating qualifying income you needed income of about $9825 per month ($117,900) in September 2018 to purchase the median price home.

 

Summing up, the cost of waiting that past year resulting in needing about 5% more funds for down payment, a 18% increase in your mortgage payment and you would need to earn 15% more to qualify.

 

The last number is the most critical, in general you need to earn 15% more in 2018 than you did in 2017 to purchase the same home.

 

Most people are not getting 15% raises from year to year. So how do the numbers look based not on a hypothetical but a reality?

 

Bill is single and approaching retirement—he plans on retiring between 2023 and 2025. He pays almost $2000 per month in rent and recently came into a financial windfall of about $200,000. We first met in March of 2017 and proceeded to have several conversations regarding his ability to qualify, and more importantly what he felt comfortable paying, for a new home. Involved in the decision process were his tax preparer, financial advisor and real estate agent. The parameters were to keep Bill’s total housing payment, PITI, at $3000 per month or lower and including closing costs not to spend more than about $120,000 to purchase his new home. This put us in a price range of about $550,000 for a new home, with a 4% interest rate our limitation was on the amount of cash to close the transaction not the monthly payment.

 

Bill actively entered the market looking at homes and condos that fell within his cash to spend and monthly payment parameters. You may recall that rates fell from the Spring of 2017 into the Summer and Fall, which was good news for Bill as he by using his cash to close as his limiting factor the same price homes became cheaper as the monthly payments went lower with interest rates.

 

Unfortunately, Bill could not find the right home for him, or by the time he made the decision to write an offer on a home another buyer had already entered escrow.

 

Because of the market as time went on the neighborhoods in which he was looking had rising prices, so to purchase the same house he needed more and more down payment to meet the 20% down we had budgeted.

 

Today, even with higher rates his ceiling of $120,000 to spend still is a sales price of around $550,000, however because of the rising prices in the market the 3-bedroom homes in that price range are now 2-bedroom homes in the same neighborhood, or perhaps even a neighborhood that is the next level lower in terms of price, location, etc.

 

Because of his hesitation throughout 2017 and into 2018, Bill has to either change his parameters to purchase the home he wants, or change locations where the average prices are lower, which creates a challenge for his commute to work, visiting family and where he would like to live in retirement.

 

We are now looking at condominiums for Bill as the prices are usually lower in the same market and we can purchase something within his cash spending restrictions as well as stay within his monthly payment restriction even with the HOA dues. In the meantime his rent has increased 5% and the landlord is considering selling the property to take advantage of current real estate prices.

 

Waiting has cost Bill not in cash to close or monthly payment but in size of home, location of home and/or type of home he can purchase today as opposed to one year ago.

 

All of which leads to a follow up question: What will be the cost of waiting, or is there one, to purchase your new home in 2019, or 2020, instead of now or the near future? A question I will explore in next week’s WR&MU.

 

 

Have a question? Ask me!

 

 

Consumer prices jumped last month. The prices consumers pay for goods and services rose 0.3% in October and year over year the general inflation index climbed 2.5%, the highest it has been in the past year, according to Consume Price Index data released this week. Leading the charge upwards in prices were gas, rent and used vehicles. This data would put upward pressure on rates, however the data used to calculate inflation by the Federal Reserve is the “core” rate of inflation—which strips out volatile gas and food prices. The core rate for October came in with a 0.2% monthly increase and the annual rate dipped to 2.1% from the prior month’s rate of 2.2%. This is a bit confusing with the two different calculations, consumers are seeing a cost of living increase of 2.5% from last year, but if they didn’t buy and gas or clothes they only saw an increase of 2.1%. Because the core rate was within expectations and the Fed’s target inflation rate mortgage rates were not impacted by the news.

 

Consumers are the most important part of our economy. Personal spending and consumption accounts for 65-70% or our economy, because of this retail sales data is an important indicator of the economy’s strength. The retail sales data for October were released this week and included revisions to the prior two month’s data. In the revisions retail sales in August and September went from slightly positive to slightly negative, the first back-to-back negative months since 2015. For October, the data showed the biggest increase since last fall with an increase of 0.8% for the month. As with the CPI data, the spending increase was led by gasoline prices, and helped with a surge in new auto purchases. Taking out gas and car sales and the increase in retail sales drops to a much more modest 0.3%, so good news for auto dealers who saw an increase in sales, not as good news for retailers who saw their customers spend on gas and cars instead of sweaters and meals out. Overall the news is neutral for mortgage rates, the revisions downward for August and September will likely result in a revision downward for 3rd quarter GDP growth from the initial estimate of 3.5%, which is good for rates, and the increase in total sales being led by volatile gas prices and one-off new car purchases is discounted by investors.

 

Rates for Friday November 16, 2018:  Rates should be a bit lower today than they are, but it appears lenders are hanging on a bit to increases in the markets (higher prices equal lower rates) due to the weekend before Thanksgiving and potential volatility in the short week. Overall rates see some upward pressure easing this week due to stocks selling off and a comment from a member of the Fed board that decides rates indicating that moving forward the Fed will be very cautious—putting some question into whether there will be three rate increases as scheduled in 2019.

 

 

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

30 year conforming                                            4.75%       Flat

30 year high-balance conforming                    5.00%      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.

 

 

 

 

Unfortunately, it often takes the misfortunes of others to appreciate the fortunes we have. Such is the case for most of us this week as we gather with family and friends for Thanksgiving. Coming together in gratitude for what we have in our lives as we observe the incredible upheaval thousands, tens of thousands, of families have had in our Southern California region via the media, both traditional and social.

 

Those impacted by the wildfires in Southern and Northern California are extremely grateful for one of America’s most important organizations, the Red Cross, who show up at every disaster with all sorts of assistance from arranging shelter, food, water, clothing, even dolls and toys for children. This comes at a cost, which is almost all from charitable donations.

 

Here is where the readers of the Weekly Rate & Market Update can help those who no longer have a home this Thanksgiving, or are displaced, due to the fires, by clicking this link and making a donation of any size: Red Cross Donations

 

We will have guests at our table from near, my father in-law, and far as two families from Chicago, Leslie’s cousins as well as a family spending their vacation week in Southern California whose daughter has gone to camp for several years with our daughters. I am anticipating some talk about the Cubs and Bears.

 

My family and I are very thankful for the support we have had over the decades from our clients, business and referral partners. As well the incredible family at Stratis Financial who work diligently to ensure our clients’ files processed, approved and funded with the utmost on professionalism and efficiency.

 

Have a wonderful Thanksgiving with family and friends wherever the holiday may take you.

 

With gratitude,

 

Dennis

 

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com

11-9-18 What kinds of loans do you and your company handle?

Question of the week:  What kinds of loans do you and your company handle?

 

 Answer:  This is a common question I am asked when meeting people, be it in a casual social setting or with professionals in other industries.

 

The broad answer is: almost any mortgage on residential property for one to four units in the State of California.

 

More specifically Stratis Financial excels at working with our clients to fund the following types of mortgages:

 

Conventional:  By far the most mortgages funded every year for residential mortgages in the United States. Broadly referred to as “conventional,” these are mortgages that are underwritten and approved to the guidelines as set forth by Fannie Mae and/or Freddie Mac. Once mortgages approved under these guidelines are funded they are sold by the lender in bundles of tens of millions of dollars to either Fannie or Freddie. While very similar with their guidelines, each of these agencies have some slight differentiation that dictates a loan can only be approved under one of their guidelines or the other. For instance in many instances Freddie Mac may only require the most recent year of Federal income tax returns for income verification for a self-employed borrower, whereas the guideline for Fannie Mae is two years of tax returns.

 

Conventional mortgages have two different loan tiers, labeled conventional and high-balance, which have different loan amounts, pricing and some different guidelines for qualifying and approval. These are the loans I put in the WR&MU rate quotes below. The maximum loan for single family residences for 2018 is $453,100, the maximum loan limit for “high-cost areas,” aka high-balance loans, for 2018 is $679,650. It is important to note that while Los Angeles and Orange County are considered high-cost areas, other counties in Southern California are not and have varying maximum loan amounts; for instance the maximum loan amount for Fannie or Freddie in Riverside County is $453,100 and in San Diego $649,850 in 2018.

 

The loan limits are established by the Federal Housing Finance Agency (FHFA) and can be adjusted annually. New loan limits for 2019 have not yet been announced, usually the loan limits for the following year are published in late November—you can be sure I will have the new limit announcement in the WR&MU the Friday we are made aware if the limits are changed.

 

Conforming mortgages can be used for one to four unit properties for primary residence, second homes and investment properties, different guidelines will apply depending on property use. As well fixed and adjustable rate programs are available.

 

Jumbo: Also referred to as non-conforming. These loans vary greatly from lender to lender as far as underwriting guidelines, loan amounts and pricing. Many lenders will start their jumbo loan programs at $453,101—just over the conforming limit—and go to several million dollars. The higher your loan amount the lower the loan to value you will have to have. For instance a lender may fund a loan up to one million dollars with a maximum loan to value (LTV) of 80%, another lender may fund up to $1.5 million with a maximum LTV of 80%. With a low LTV, say 60%, some lenders may have maximum loans of two million dollars, others may go up to ten million, or higher.

 

Most lenders in our market do not retain their jumbo mortgages but sell them to investors after funding, it is the investors who create the guidelines and determine the loan limits. Because different lenders use different jumbo investors we are able to fit specific criteria for clients to the jumbo programs available through different lenders.

 

A rule of thumb for jumbo loans is that the underwriting guidelines are stricter, how much stricter depends on the investors. As an example, one program may require any income to show it has been paid on a monthly basis for six months or more, say for payments from a retirement account, whereas another lender may use the annual distribution from the account, or show that an automatic payment has been set up. Reserve requirements, property features, income calculations, and other quirky guidelines differ from lender to lender and from Fannie and Freddie that may help one borrower or hurt another.

 

Another rule of thumb is that jumbo loans are higher priced than conforming; however this is not always the case. Not infrequently we will find a jumbo program that has a lower rate than other lenders high-balance conforming rates, when this is the case we ensure that the clients meet the more restrictive guidelines of the jumbo program and if so we lock them in at the lower rate and fund the jumbo mortgage. It makes no difference to the borrower that they do not have a Fannie Mae or Freddie Mac loan, especially if they are able to save money on a lower interest rate or cost of the mortgage.

 

Jumbo mortgages can be used for one to four unit properties for primary residence, second homes and investment properties, depending on investor, different guidelines will apply depending on property use. As well fixed and adjustable rate programs are available.

 

FHA: The original 30 year fixed rate mortgage for homeowners in the United States. The Federal Housing Administration was created in 1934 as part of the National  Housing Act that established the Department of Housing and Urban Development (HUD) as part of President Franklin D. Roosevelt’s New Deal agencies, also referred to as his Alphabet Soup. The New Deal Agencies were created by Roosevelt as part of his plan to pull the nation out of the Great Depression and besides HUD and FHA included the Securities and Exchange Commission (SEC), National Labor Relations Board (NLRB) and many other more specific purpose agencies such as the Tennessee Valley Authority (TVA) and national agencies like the Public Works Administration (PWA).

 

Homeownership prior to the Depression was very low and most homeowners had short term mortgages held by banks. The terms of the mortgages were very much in favor of the lenders and as a result foreclosure was relatively easy and could occur quickly, often with only one missed payment. The Depression caused a significant percentage of homeowners to lose their homes and farms to foreclosure.

 

The purpose of FHA was to insure mortgages funded by banks and lenders to encourage and enable lending to potential homeowners. It created 30 year mortgages, which resulted in lower monthly mortgage payments and established guidelines that made foreclosure a more difficult process for lenders to enable homeowners to recover from a brief set-back and retain their homes.

 

FHA still does not fund or purchase mortgages, instead the agency insures mortgages against default provided the mortgages follow the underwriting guidelines established by the agency.

 

Guidelines for FHA mortgages are generally more lenient than for conforming or jumbo mortgage products, especially for down payment requirements, income to debt ratios for qualifying and use of co-borrowers and gifts for assisting in qualifying. Looser guidelines mean riskier loans, but because the mortgages are fully backed by the United States government lenders are willing to make these loans at rates very near, often below, conforming lending rates.

 

The insurance the mortgages are paid by the borrower in two manners. There is the upfront mortgage insurance premium that is added to the loan amount at closing, plus a monthly mortgage insurance payment that is paid for the life of the loan. This adds to the cost of the loan, which depending on the rate markets could cause it to be more expensive than a conforming mortgage, however due to the looser guidelines it is often the best opportunity for many families to purchase or refinance their home.

 

It is important to note that the loan limits for FHA mirror those of Fannie Mae and Freddie Mac.

 

FHA mortgages can be used for one to four unit properties for primary residence, second homes and investment properties, depending on investor, different guidelines will apply depending on property use. As well fixed and adjustable rate programs are available.

 

VA: Congress passed the Servicemen’s Readjustment Act of 1944 and signed into law by Roosevelt. The law is more commonly known as the G.I. Bill and among the many benefits included in the Act was the establishment of the VA loan to enable active duty members of the military and qualified veterans to purchase homes with no down payment.

 

Like the FHA, the Veterans’ Administration does not fund mortgages but does insure them, which is why lenders will provide mortgages to those eligible with no down payment. The insurance, known as the funding fee, is added to the loan amount which would result in a loan above the value of the property, or if agreed upon the seller may pay the funding fee for the borrower. Due to the ability to finance the funding fee over the period of the loan a VA mortgage of the same amount and interest rate will have a lower monthly payment than a FHA mortgage.

 

There are similarities to FHA in guidelines for VA loans; however the biggest difference in the qualifying guidelines is that VA is not dependent on the debt-to-income ratio for loan approval. Residual income is the underlying guideline for VA loan qualifying. Instead of having a hard debt-to-income ratio of 50% of your gross income for total housing payment and debt obligations, the VA uses a minimum residual income amount for qualifying if necessary.

 

For instance in qualifying for a mortgage the applicant may have a debt-to-income of 55%, above most loans qualifying limit. However using residual income calculations the new housing payment including taxes and insurance, federal and state withholdings and payment for debt obligations, including but not limited to car and student loans, credit cards, alimony and/or child support are added up and subtracted from the applicant’s gross income. Depending on the amount of residual income the veteran can be approved. The amount of residual income required depends on the where the property is located and the number of family members; a single veteran purchasing in eastern Georgia will have a $441 residual income requirement whereas family of four in Southern California will have a $1003 requirement.

 

There are some criteria to be eligible for a VA loan, primarily the veteran must be honorably discharged from the service. There is a calculation for the maximum eligible loan amount based upon the entitlement available to the applicant from the VA. If a veteran has not used any of his or her entitlements the maximum loan amount, if qualified, could exceed one million dollars—there would be a down payment required, but significantly less than what would be required for FHA, conventional or jumbo loans for the same property.

 

VA loans are only available for the purchase or refinance of the veteran’s primary residence. In some instances a second property can be purchased using a VA mortgage, but it is a rare set of circumstances that would allow this.

 

VA loans can be used to purchase 2-4 unit properties as well as single family residences as long as the veteran will be occupying one of the units. Different guidelines may apply regarding loan amount calculations. As well fixed and adjustable rate programs are available.

 

Non-Qualified Mortgage: Also known as Non-QM, non-traditional, asset-based, or hard money, these loans practically disappeared following the passage of Dodd-Frank in 2010. The Wall Street Reform and Consumer Protection Act, commonly known as it Dodd-Frank after its sponsors Senator Christopher Dodd and Representative Barney Frank, was enacted following the 2008 housing and mortgage market melt downs.

 

One of the provisions of the law is that residential mortgages must meet certain guidelines to be considered a “qualified residential mortgage”. Among the qualifications are that the borrower must show evidence of income to support repaying of the mortgage; note not cash or assets, but evidence of income, the loans not be amortized for more than 30 years, do not have total points and fees in excess of 3% of the loan amount and cannot have interest only or negative amortization features.

 

These guidelines was in response primarily to the proliferation of no-income-verification mortgages that were funded by banks and lenders and either held in private portfolios or for the bulk of such mortgages purchased by Fannie or Freddie. The other factors such as negative amortization and interest only features in loans certainly contributed to the ease of credit that created the market collapses, but were secondary to the stated income mortgages as the primary cause.

 

If a lender funds mortgages that do not meet the guidelines of the qualified mortgage (QM) rule then the lender must retain at least 5% of the loans they sell into the secondary markets. This 5% rule creates a risk-retention factor for lenders in the Non-QM sector, or mandating they have some skin in the game.

 

Over the past few years we have seen an exponential growth in the number of Non-QM programs and lenders in the market offering loans using bank statements or other methods to determine ability to qualify for mortgages. Qualifying income is not the only reason these products are utilized for residential borrowers, others include issues with credit, subject property or chain of title and ownership history that do not meet the guidelines for conforming or jumbo products available. These loans are often part of a long term plan of obtaining funds for the purchase or refinance of a property with the intention to replace with a conventional or jumbo mortgage with more favorable rates or terms in the future.

 

Due to the considerably looser underwriting guidelines and the retention requirements for the loans these mortgage products have higher interest rates than conforming and jumbo mortgages.

 

Non-QM mortgages can be used for one to four unit properties for primary residence, second homes and investment properties, depending on investor, different guidelines will apply depending on property use. As well fixed and adjustable rate programs are available.

 

Stratis Financial has many other mortgage and home loan products available depending on the needs of property owners. If we do not offer a product, or I feel we are not competitive with a product, I routinely refer out to other lenders who have those products and meet the service levels we require for our clients.

 

What is your mortgage need? If you are uncertain please give me a call to discuss your needs and we can determine the options available for you.

 

Have a question? Ask me!

 

A few economic bits of news this week that investors key off of when making decisions which could impact mortgage rates. Consumers charged less in September than in August but borrowed more. For the fifth month out of the last eight, credit card use declined, which can be of some concern if the reduced credit card purchases result in lower consumer spending—which accounts for 65-70% of our nation’s economic activity. Total consumer debt continues to grow, at a slower rate than prior months but still growing, however much of the borrowing is for long term purchases such as vehicles and homes. The other somewhat significant piece of news was the release of the Producer Price Index for October.  If investors digested their news like many individuals do, i.e. just read the headlines without reading the details, they would have sold, sold and sold mortgages and bonds today causing interest rates to spike. The headline was that wholesale prices jumped in October for the highest increase in the PPI since 2012, climbing 0.6% for the month. Reading into the data we see that the increase was primarily due to higher gas prices. When the “core” rate of wholesale inflation is examined, with gas and food stripped out of the index, the rate of increase drops to 0.2% for the month, which is what investors expected.  Year over year the wholesale inflation rate is 2.9%, up 2.6% from September.

 

The Federal Reserve met this week. As expected there was no change in interest rates, what most followers of the Fed were interest in was the statement following the meeting regarding policy and future expectations. The statement on the economy was pretty much the same as it has been, mentioning the positive job growth and economic growth and that the Fed expects to gradually increase the federal funds rate in the future. Absent some major change in the economy from its current path, or a major non-economic event, we can expect the Fed to increase rates by one-quarter of one percent (0.25%) in December and then three times in 2019.

 

Rates for Friday November 9, 2018: Mortgage rates bounced around a bit this week but we finish with the conforming rate being flat from last Friday and the high-balance rate declining one-eighth (0.125%). Rates have been within a tight range of one-eighth of a percent for the past six weeks, any news positive or negative could prompt a break out of to higher or lower rates. In other words we continue to have a volatile somewhat unstable rate market.

 

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

30 year conforming                                            4.75%       Flat

30 year high-balance conforming                   5.00%      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.

 

 

Another milestone in the Smith household as our youngest passed her driver’s test and drove herself to school on Tuesday instead of taking the bus. It also has resulted in the big car shuffle as she took my 2006 Pilot, I am now in the 2010 Odyssey and Leslie moves into what was our oldest daughter’s 2001 Infinity until we decide it is time to get her a more recently manufactured set of wheels. We’re not real big on buying new cars in our family on a very frequent basis.

 

Have a great week, and drive carefully—especially around Bixby Knolls!

 

Dennis

 

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com

11-7-18 Should I refinance and payoff my HELOC?

Question of the week:  Should I refinance and payoff my HELOC?

 

 Answer:  My most frequent response to questions of the week definitely applies to this question: It depends.

 

There are several factors to consider when deciding if now is the time for you to refinance and fix the rate on you Home Equity Line of Credit (HELOC).

 

Before we get into various factors to discuss, let’s take a quick look at why the question is being asked. Your HELOC has three components that determine your current payment, the balance, the prime rate and the amount added to the prime rate (called the margin) that results in the rate you are being charged.

 

Of the three factors the only one you somewhat control is the balance; you can impact your payment by paying down the balance on the HELOC. Obviously, the more you pay towards the balance the lower your payment will be on a monthly basis. Most HELOCs have two periods of repayment. The initial payment period usually has a minimum payment requirement that is the interest accrued on the loan since the last payment. The next stage of payments is usually a fully amortized period for the remaining life of the loan; if you may have a HELOC that is a twenty year loan, in this case typically the first ten years of the loan have an interest only payment, at the start of the eleventh year the loan will be fully amortized based on the remain ten years of the loan.

 

Example: You have a $150,000 balance on your HELOC that you obtained in December 2008 and the current rate is the prime rate, currently 5.25% plus one-half of one percent (0.500%) for a payment rate of 5.75%. Your minimum payment for November is the interest on the balance, $718.75 (balance times rate divided by twelve months). Next month you begin your eleventh year and the loan payment is now fully amortized using the rate that month plus the remaining term of 120 months. The rate for the December payment is the same as November, since the prime rate has not moved, at 5.75%, since you paid the interest only payment in November balance is still $150,000 but now instead of interest only the payment is amortized to include principal reduction and the payment will be $1646.54. Since the Federal Reserve is expected to increase its funds rate by 0.25% in December that means the prime rate will increase by 0.25% as well so the January payment will be calculated at 6.00%** and your payment will be $1655.00 for the month.  **Since the Fed will increase rates into the month the rate will only be for part of the month with the earlier part of the month being calculated at the 5.75% rate, but for demonstration purposes easier to show as one complete month.

 

The lower your balance when you enter the fully amortized payment portion of the repayment of your HELOC the lower your required payment will be.

 

If you have a HELOC for three years or more you have seen your rate increase by two percent since 2015 and one percent since last November. The chances are you will see at least another one percent increase in the next year, with a 0.25% in December when the Fed is expected to increase rates again.  (To see why the Fed increasing rates impacts your HELOC rate here is link to WR&MU from a few weeks ago addressing the issue.)

 

With rates having climbed one percent or more in the past twelve months the decision to refinance is a lot harder than it was one year ago, or even two to three months ago and moving forward the decision might not get easier.

 

The first consideration is if you are risk averse or not. The risk averse individual would be more inclined to want to refinance to avoid future increases in rates on their HELOC as well as for long term fixed rate mortgages that would be used to refinance. The person more comfortable with risk might be less inclined to refinance. Why?

 

The person who is willing to accept more risk may take the stance that their underlying primary mortgage has an interest rate that is lower than the rate available to refinance their primary loan plus their HELOC and will accept the higher rates on their HELOC in the future and if need be make interest only payments with the hope that rates decline in the future so refinancing makes more sense, or to enable easier paying down of the mortgage.

 

The risk averse person does not want the uncertainty of not knowing how high their rate and payment will go on their HELOC and is more willing to trade off what would probably be a higher payment in the short term for what may be a lower payment in the long run. The risk averse person knows if rates do drop in the future they can likely refinance and lower their payment.

 

What are the factors in terms of payment that need to be considered? First and foremost is the payment differential between doing nothing and refinancing. There are four primary factors that will determine the payment at which the interest rate for your refinance will be calculated: balances, credit score, loan-to-value and whether the transaction would be considered cashout or not.

 

The first three factors are pretty elementary; the combined balances of your existing primary mortgage and your HELOC will determine the refinance loan amount, your credit score is determined when we pull a credit report, the loan-to-value is determined by the estimated value of your home and the refinance loan balance.

 

The fourth factor, whether the refinance transaction is considered a cashout transaction or a rate and term transaction. For conventional mortgages unless the HELOC can be proven to be part of the purchase price of the property the transaction is considered to be a cashout transaction, if your HELOC was used to purchase your property the transaction is considered to be a rate and term refinance, and will have lower costs than the cashout. If the loan is a jumbo loan we have several programs that will consider the refinance a rate and term transaction is you can prove you have not accessed any funds from the HELOC in the past twelve months.

 

Once we know the four factors we go to our rate sheets and determine the rate, and also your what your new payment would be after refinancing. With this information you can determine if you want to refinance and payoff your HELOC into a fixed rate mortgage, or continue as you are with your current primary mortgage and HELOC.

 

Since the minimum payment for most HELOCs is interest only even if you were able to refinance near what your current mortgage rate is the chances are you will see some increase in total payment as you move from interest only to paying down principal on your HELOC. With rates higher and most homeowners with rates closer to 4.00% than today’s rates the chances are that your payment will likely increase a few hundred dollars per month, or more, when refinancing to pay off your HELOC. And this is the basis for the hard decision, is the extra monthly payment worth it to remove future risk based on rising interest rates, or is the cost too much for you to want to remove the risk?

 

This is a question I am very willing to help you answer by running the numbers and options for you and your particular situation. For several years we have been encouraging homeowners with HELOCs to refinance to fix their rate and payment on their mortgage debt, while I still feel it is a good idea for most homeowners, it may not be your choice, however I encourage you to run the numbers and know the options. If your HELOC is converting from an interest only payment to fully amortized in the next few years you may want to give refinancing even more consideration due to the sharp increase in your monthly payment when that occurs.

 

If you, or someone you know, has a Home Equity Line of Credit please contact me to go through your information so you have the information needed for making a decision on whether to refinance.

 

Have a question? Ask me!

 

Better economy, higher rates. That correlation is something long time readers of the WR&MU have learned over the years. This week we have positive economic news released every day, some data a lot more positive than others. Here are the data releases that have the greatest impact on rates.

 

Households made more and spent more in September. Income growth for the month was slower than August but still positive at 0.2% matching the core inflation rate for the month. Holding back income growth was a slow down for self-employed businesses. Savings rates dropped as consumer spending increased in September by 0.4%, the seventh month in a row with spending increasing by 0.4% or more. The disparity in spending and income growth may have been impacted by Hurricane Florence. The very good news for the economy inside the data is that there was a sharp increase in the purchase of new cars and recreational goods—the sort of spending that occurs when the economy is strong and consumers are optimistic. The news is not good for interest rates, though tempered a bit as the year over year inflation index of 2.0% is in line with the Federal Reserve’s target.

 

My oldest was one the last time the American consumer was has confident as s/he was in September, as the consumer confidence rose to its highest level since 2000. The cutoff date for the survey was mid-October, before the stock market slump so the expectation is that the index will drop in November. This news also puts upward pressure on interest rates.

 

Continuing the short term historic gains was the Employment Cost Index which showed wage gains in the private sector reached their highest level in ten years in the third quarter, with wages, salaries and benefits increasing 0.8% for the period. The gains reflect the lowest unemployment rate since 1969. A very big concern for economists is wage inflation, higher prices driven not by demand but by the cost of production of goods and services being driven higher by employment costs. The ECI report puts that concern very much in the center of the inflation and rate conversation. While this news is good for workers it is bad for those wanting lower interest rates.

 

Today’s data just piles on. The jobs report was released by the Labor Department today showing the labor situation in September. The news shows a very strong labor market, stronger than expected. Nonfarm payrolls increased by 250,000 in September, well above the forecast of 208,000 jobs. Included in the report was year over year growth in wages of 3.1%, the highest gain in one year since 2009 when the recession ended, the average hourly pay is now $27.30. This report fully supports future rate hikes from the Federal Reserve and continued upward pressure on mortgage and other long term rates.

 

Rates for Friday November 2, 2018: Despite the quantity and quality of positive economic news conforming rates hold on from last Friday, high-balance loans ($453,101 to $679,650) increased from last week back to seven year high first reached in early October. The only reason I can see for rates to undergo a migration down would be a catastrophic event causing investors to flee to the safety of long term fixed rate returns available in U.S. Treasury bonds and mortgages.

 

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

30 year conforming                                                4.75%       Flat

30 year high-balance conforming                       5.125%     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.

 

 

 

As many of you know I love baseball. During the season most afternoons I have the Phillies radio broadcast, or some other game back east playing on my computer and on weekends I listen to games from Philly or around the country while driving around or doing chores. Last Friday night’s game between the Dodgers and Red Sox that went 18 innings was pure heaven for me and I was thrilled the way it ended, not necessarily because the Dodgers won but that it was won on a great home run and not an error. Every inning was thrilling and had fans on the edge of their seats. While mildly upset the Red Sox won another championship and the Dodgers drought is now thirty seasons, I admire the Sox for the way they played this season and through the playoffs; the best team hoisted the trophy to end the season.

 

Now we wait until the end of February when Spring Training starts!

 

Have a great week,

Dennis

 

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com

10-26-18 Why can’t you use my bonus income to qualify me for my new home?

Question of the week:  Why can’t you use my bonus income to qualify me for my new home?

 

 Answer:  Income must be of a constant and continuing nature.

 

What constitutes “constant and continuing?” Generally, at least a two year history of receiving the income fulfills the requirement. There are some exceptions which I will cover below, but the question of the week specifically addresses bonus income, and much of this will apply to overtime and commission income as well.

 

Bonus income typically fluctuates from year to year depending on the matrix upon which the bonus is based. Because of the fluctuation there must be a guideline for the lender to consider the income for qualification purposes for your mortgage application. The industry standard is that if you have received a certain type of income for two years are more then we have reached the threshold of constancy. To reach the continuing nature policy we generally need a statement from your employer that the bonus will in all probability continue; this guideline is usually met with a letter from the employer or with a Verification of Employment (VOE) that we send your employer to complete. The VOE has sections for your employer to complete stating the length of employment, income for each of the past two years plus year to date broken down into base, bonus, overtime and commission. As well there is a place to indicate whether the continued payment of bonus, overtime and commission is likely to continue in the future.

 

Whether your bonus is paid annually, quarterly, monthly or per pay period does not matter for qualifying, we will convert the amount received into a monthly amount based on the amount received for the past two years, and if applicable year to date. The rule of thumb for bonus income, as well as overtime and commissions, is to use at least a two year average, unless the most recent year is lower than the prior year in which case the lower amount is taken.

 

Example: You have been with your company for five years and have received bonuses every quarter for the past three years and the bonus is paid on the first paycheck after the end of the quarter. In 2016 your bonuses totaled $12,000, in 2017 $12,600 and on your October 15th pay period your total bonuses year to date including September totaled $9700. The total amount received in bonuses is $34,300 over the past 33 months (two full years plus nine months in 2018), so we divide the total amount received by the time period over which it was received and get $1039.39, this is the amount of bonus income we will use for your qualifying for your mortgage—provided your employer verifies that you are likely to continue to receive bonuses in the future.

 

Example 2: Same employment scenario as above, however in 2016 you received $12,000 bonus, in 2017 you received $10,000 bonus and through September you have received $9000 in bonus income as reflected on your recent paycheck. It is evident you received $1000 per month in 2016 and so far in 2018. However, in 2017 your bonus was $833.33 per month—this is the bonus income that most lenders will use for income qualifying as it follows the standard guidelines from Fannie Mae and Freddie Mac. Even with a letter from your employer regarding 4th quarter bonus the lender will take the worst case scenario when calculating income.

 

All this covers how we do calculate and count your bonus income, back to our question, why is your bonus income not allowed? Reading through the above it is likely because of any or all of the following:

 

  • You have not received your bonus for at least two years
  • Your bonus has been inconsistent, i.e. you received bonus income in 2016 but not 2017
  • Your employer will acknowledge that your bonus is likely to continue, which we saw not infrequently during the recession with employers very hesitant to put in writing bonuses are guaranteed or likely to continue creating a legal document an employee may use against the employer should bonuses be canceled.

 

Any non-wage employment income is generally treated in a similar manner, most prevalent being overtime, commission and self-employment income.

 

As mentioned above there are some exceptions to the two year income rule:

 

New job—If you are starting a new job, depending on the circumstances, we can generally count your income with a short, or perhaps no, history of employment at the new job. Typically, showing at least thirty days of income is needed. If you are transferring from working for Dennis Sprockets to Smith Widgets and in somewhat the same type of work, we can use your new income—but not overtime or bonus unless expressly addressed and quantified in an employment contract and if you received similar amounts in your prior job. New professionals can also have “young” income used for qualifying with proof of education in the field and an employment contract. If transferring geographically and a new job with a new company we can usually use your new employment income before you start on your job with an employment contract and separate letter from a senior executive at the company.

 

Spousal support—If you have a divorce decree or separation agreement that is recorded that includes your receiving alimony or child support we can use that income once you can prove you have received six monthly payments in a timely fashion. Note the income must be received as one payment every six months and not six months’ worth of payments upfront. As well the agreement must indicate the income will be received for at least three years after the date of your mortgage application; for instance, if you are receiving $800 per month for each of your two children until they are 18 and your son is 16 then we will only accept $800 for qualifying for your youngest child.

 

Retirement income—If you receive a pension or social security income you do not need to show a two-year history. Provide your award letter stating the amount of income you are to receive and we will use the current income for social security; for a pension, we must show that the pension income will continue for at least three years.

 

Asset accounts—Most individuals and couples have their financial assets in a retirement account and/or taxable investment and bank accounts. Depending on several factors these accounts could be used for qualifying income. Retirement accounts can be used for income if you are taking regular withdrawals from the account. Depending on your age and the type of retirement account you may be having to take mandatory distributions on an annual basis, this can be used for income. Or if you are taking regular distributions we can use those amounts as income as well. If you have funds in non-retirement accounts there are some cases where we can perform a calculation called “asset depletion” so we can achieve qualifying income.

 

Rent—If you are purchasing a new home and renting out your existing home there are guidelines we can follow to use the rental income from your current residence as qualifying income to offset the mortgage, tax and insurance payments.

 

Bonuses, commissions, retirement, wages, there are many different sources of income; whether yours is eligible for use as qualifying income can depend on different factors. If you, or someone you know, if looking to purchase or refinance property please contact me to ensure you are fully qualified for the transaction you want to make.

 

 

Have a question? Ask me!

 

Don’t bury the lead. A couple of big pieces of economic news, since weekly update is primarily about mortgages and real estate we will start with the major news on home sales. This week the California Association of Realtors released its housing report for September. Based on the data I am of the opinion the real estate markets have become a buyer’s market. Los Angeles County saw the median home price increase 4.5% from August and 4.7% from 2017 to a value of $634,680. While the median price increased there was a dramatic drop in total sales. Sales volume for the month was down 18.3% from the prior month and 22% from last year. Neighboring Orange County saw both the median price and total sales volume drop in September. The county median price of $825,000 was down 1.6% for the month and 3.3% for the year, total volume was down 20.3% from August and 21.8% from September 2017. The data that supports my contention of our regional market being a buyer’s market is the increase in the number of active listings on the market and the time a home is on the market before it is sold and enters escrow. Basic premise, more supply leads to lower prices. Supply is growing and demand is not due to several factors, primarily higher interest rates.

 

Impacts sales and refinances. The softening market not only impacts sellers as they see values slowly erode, but also can have an impact on homeowners looking to refinance to lower payments, consolidate equity lines or obtain equity for various reasons. How? With a softer market there is more downward pressure on appraisals and therefore values needed for refinancing, or the rate and cost of the refinance due to potentially higher loan to value based on potentially lower appraised values.

 

The national economy is not following housing. This morning the initial estimate for the Gross Domestic Product was released and it showed growth in the quarter of 3.5%, slower than the 4.2% GDP growth in the second quarter. The expectation is that 2018 will end with total economic growth of 3% or greater, the first year with such growth since 2005. The report was, as you can expect, sprinkled with good news most notably the decline in inflation from 2% in the second quarter to 1.6% in the third quarter. That is good for consumers, but is it good for the economy? With some weakness in business spending and investment, slowing inflation and the equity markets dropping in recent weeks the signals are there for economic growth slowing, or reversing in 2019. It is quite possible, probable?, that a mild recession will begin in the third or fourth quarter of 2019. Overall the GDP news was market neutral as the growth figures met expectations.

 

Rates for Friday October 26, 2018: With stocks falling this week investors have been moving their funds to bonds and mortgages resulting in rates falling from last Friday. We remain in a volatile market and caution is strongly advised when thinking about floating your rate.

 

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

30 year conforming                                            4.75%     Down 0.125%

30 year high-balance conforming                       5.00%     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.

 

 

 

 

Few things are better than a short trip that feels like a very long trip. That was the experience Leslie, our daughter and I had last week when we flew out to Boston to see our college freshman. Leslie and I walked about 13 miles on Saturday, mostly up the Charles River while the internationally famous Head of the Charles rowing regatta was going on, watched a performance by the marching band, where ironically our daughter is the tallest in the flute section as she was in high school, then we all enjoyed a fantastic and leisurely lunch/dinner at an Italian restaurant, topped off with the ubiquitous visit to Mike’s for some pastries. Another long walk to LL Bean to get our girl squared away with duck boots for the coming winter and it was back to our hotel for a few hours of catching up and just being together. A packed day, with plenty of needed hugs, mostly for me, and just seeing how happy she is with her friends, college and new city and mom and dad have come home at ease.

 

Now we are looking forward to our next time seeing her when she is home for four weeks at Christmas!

 

Have a Happy Halloween and don’t get too spooked by the gremlins and goblins showing up on your doorstep…I’ve noticed they leave you alone if you bribe them with some sugary treats!

 

Have a great week,

 

Dennis

 

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com

10-19-18 Fed Scares Market–Rates Up

Question of the week:  No question this week as travelling to Boston to see our daughter.

 

Have a question? Ask me!

 

The October 5th Weekly Rate & Market Update question of the week was “How does the Federal Reserve impact mortgage rates?” In the answer I discussed how comments made by members of the Federal Reserve Open Market Committee (FOMC) as recorded in their minutes have a tremendous impact on mortgage rates as investors read the comments and then react based on what they think the Fed will do in the future, encourage higher rates, lower rates, make no moves? This commentary by me two weeks ago was proved on Wednesday when the minutes from the September meeting of the FOMC were released.

 

Several members of the committee expressed that rates would need to continue to rise until they were restrictive on the economy and able to slow growing inflation pressure. There were no quantitative dates as to how long rates should rise, nor how much. There did appear to be consensus that the Fed would raise its funds rate again in December, expectations are for another one-quarter of one percent (0.25%). Gleamed from the minutes was that instead of the previously expected one more rate hike in 2019 it seems the FOMC is looking at three more rate hikes next year.

 

Reading the minutes regarding concerns about inflation, tighter labor markets driving up costs as well and need to make sure economy does not get too hot to push inflation too far above the Fed’s target rate of 2% annual inflation, investors began selling off in the bond markets, for reasons mentioned in the October 5th WR&MU—they do not want to get caught with an investment that will be dropping in price, the Fed minutes indicated higher rates, therefore lower prices on their bond investments.

 

The most basic rule of economics is the greater the demand the greater the cost, the greater the supply the lower the cost. When more people are selling a product or service than there are willing buyers the price of that product or service drops. In the bond, and mortgage, markets when the price drops rates rise. With the large sell off in the rate markets on Wednesday rates rose.

 

The market reacted instantly to the Fed, just as expected and discussed in the WR&MU two weeks ago. The reaction was to essentially price in three rate hikes for the Fed, one in December and two by June 2019.

 

Rates for Friday October 19, 2018: With the sell-off in bond and mortgage markets on Wednesday it is no surprise that rates are a bit higher this week after dipping last week. Investors are looking for any reason to support their feeling the Fed has at least three-quarters of a percent (0.75%) in rate hikes coming in the next eight months. Unless the economic data shows a slow-down in the economy or inflation breaking below 2% and lingering, there is little expectation for lower mortgage rates in the future based on the economy.

 

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

30 year conforming                                            4.875%    Up 0.125%

30 year high-balance conforming                      5.125%     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.

 

 

 

Leslie and I are visiting our oldest this weekend. She is a freshman at Boston University and it will be good to see her and her digs in a dorm tower high above Commonwealth Avenue. When she and I were texting last week I said, “you need a hug from Mom.” “Yeah.”

 

I then said, “I need one from you.” “I know.” I am a hugger, thankfully I have two daughters who are probably a bit more receptive than if I had two teenage boys, a bit.

 

Have a great week,

 

Dennis

 

You can find past Weekly Rate & Market Updates on my website at www.DennisCSmith.com/My-Blog

10-12-18: We just received our property tax bill…

Question of the week:  We just received our property tax bill…

 

 Answer:  Okay, okay this is not a question; it is the start of a question. There are several phrases to make it a question I will quickly go through this week:

 

…why is it lower than you estimated when we purchased our home earlier this year?

 

…why is it higher than last year since we are under Proposition 13?

 

…how much should we pay?

 

 

…why is it lower than you estimated when we purchased our home earlier this year?

 

If your property tax bill is significantly less than my estimates when we funded the loan to purchase your home then you will very likely receive a supplemental tax bill, if you have not received one already and the two bills added together, the tax bill you have just received from the County where your property is located and the supplemental tax bill, should be close to the estimate we used when you purchased your home.

 

In California the fiscal year is from July 1st to June 30th. The tax bill property owners have received in the past week from their County Assessor has an option of paying half the bill by December 10th covering first half taxes from July 1st to December 31st and the other half by April 10th covering the second half taxes from January 1st to June 30th. The tax bill mailed in September or October is based on the prior tax bill as adjusted for Prop 13, or if there was a transfer the value on January 1st.

 

When you purchase a property the tax base for the property is adjusted based on your purchase price. Depending on when you purchased the property the new value may not be adjusted by the County Assessor before the tax rolls are set for the coming fiscal year. If this is the case the tax bill you have received reflects the prior assessed value plus and adjustments for Prop 13 (see below) or additional payments for taxes or bonds put in place by voters or local government. This is the primary reason your tax bill is probably lower than you anticipated, and why you will receive, or have received, a supplemental tax bill.

 

The supplemental tax bill covers the difference between the taxes on the tax bill and the taxes you should be paying from the date of the close of escrow on  your property purchase to the end of the fiscal year, June 30th. Depending on the seller’s assessed value and your purchase price the supplemental bill can be very large, very small, or even “negative,” in which case you will receive a refund from the County.

 

Supplemental tax bills are only mailed a few times a year, so it may be some time after you closed your purchase before you receive your supplemental bill. Please note, if you have an impound account and your lender is collecting and paying your property taxes that your supplemental bill is not sent the supplemental tax bill, the payment is entirely your responsibility.

 

Confused? Let’s say you purchased a home for $650,000 and closed escrow on February 7th. Using our rule of thumb of your property taxes being 1.25% of the purchase price your annual taxes the first year of ownership should be $8,125 per year ($4062.50 for the first and second half tax bills). Your seller purchased the property in 2000 for $375,000 and their assessed value has risen through the years and their tax bill the year they sold the property was $5500. You just received your first property tax bill from your County Assessor and it shows you owe $5610 conveniently payable in two payments of $2805 each.

 

There is a difference in annual taxes between what you should be paying and what you are being billed of $2625. However this will not be the amount of your supplemental tax bill as that is the annual property tax differential and you only owned the property since February 7th, not July 1st of the prior year. There are 143 days between February 7th and June 30th, and that is the period which the higher assessed value should be applied for property taxes. Therefore your supplemental tax bill will be the annual property tax differential divided by 360 days multiplied by the number of days you owned the property between the sale date and end of the tax year:

 

$2625/360 = $7.29 per day x 143 days = $1042.71 as your supplemental bill.

 

Note that depending on your closing date you may receive more than one supplemental bill.

 

It can get pretty confusing, however most County Assessor websites have links where you can input your address, sales price and closing date and it will calculate your estimated supplemental tax bill.

 

…why is it higher than last year since we are under Proposition 13? Prop 13 was passed at the ballot box by California voters on June 6, 1978. There were three major items in the measure that immediately impacted property owners in 1978. First, it decreased assessed values by having all properties in California re-assessed to their assessed values in 1976. Second, it capped the assessed value of real property taxes by to the state at 1% of the ad valorem value of the property, i.e. the transaction value. Third, it limited increases to assessed values to an inflation index but not to exceed two percent (2.00%) per year.

 

It is the third factor that confuses many new or experienced property owners when they receive their property tax bill that the total is higher than what they paid the year before. Since property values are increasing your assessed value is increasing as well, but not more than two percent above the assessed value from the prior year.

 

Also surprised are those property owners who do not follow the news or politics. Their surprises come in the form of special assessments put on tax bills by either voters or elected officials in the form of bonds or taxes. For instance for our home in Long Beach we have nine such assessments that add 29% to our base tax rate of one-percent. Three of the assessments are local bonds for the Metro Water District, Long Beach Community College District and the Long Beach Unified School District; the other six are county measures and bonds for parks, flood control, sanitation, etcetera. Every city and county has different special assessments on their property tax bills that are added to the one-percent maximum taxable assessment from the state.

 

…how much should we pay?  The first question, “how much should we pay?” is a follow up to my Weekly Rate & Market Update from December 22, 2017 after the new tax law was passed that limited SALT (State And Local Tax) deductions to $10,000 per year. In the WR&MU the question was given the reduction in ability to deduct California state income tax and property taxes to a cap of $10,000, did it make sense for California property owners to pay both the first (due by December 10th) and second (due by April 10th) half taxes in 2017, which would result in most property owners who did this paying three half year tax year bills in 2017 (2nd half of 2016-17 in April 2017, 1st half of 2017-18 in December 2017 and 2nd half of 2017-18 in December 2017) thereby maximizing their property tax deductions. The advice from my CPA tax preparer friends Lew Finkelstein and Paul Scholz was, “depends” as some clients would not benefit from the additional half-year of taxes deduction if they were under the Alternative Minimum Tax (AMT) zone for 2017. For most people however it did make sense to pre-pay the April 10th payment and get the deduction.

 

What about this year? Before I answer here is the disclaimer: I am not a tax professional or accountant, before you make any decision as to how much you should pay in property taxes this year consult your tax preparer.

 

If you did pay the second half of your property taxes in 2017 instead of in April of this year, your property tax payment due by December 10th will be your first property tax payment of the year. Should you also pay the second half bill due by April 10, 2019? Again, it depends. If you pay just the first half payment, will your total of property taxes paid plus state income taxes be less than or more than $10,000? If your total is less than $10,000 you may want to go ahead and pay both first and second half property taxes in December to maximize your deduction; if your total is more than $10,000 you may want to pay the second half taxes next year in April when due—which means in 2019 you will again be over the $10,000 limit but at least you will not have a double tax payment in December when you may need the extra cash for the holidays.

 

Confused? Let’s say your annual tax bill is $6,000, you owe $3000 by December 10th and another $3000 by April 10th. You paid the full property tax bill in December of last year, so this year you have paid no property taxes. As a household your state income taxes for 2018 are approximately $8000 for the year. You have to pay your first half tax bill of $3000, so you will have paid a total of $11,000 in SALT (State And Local Taxes, i.e. income and property taxes) and can only deduct $10,000 on your federal taxes, so you have lost $1000 in deductions you used to get. If you pay the full $6000 then you will pay a total of $14,000 in SALT, can only deduct $10,000 so lose $4000 in deductions you used to get.

 

If you just pay the first half, in April you will have to pay $3000 for the second half taxes, in December you will have to pay the first half taxes for 2019-20, assuming it increases the maximum amount (2%, see above) that payment will be $3060 for a total of $6060 paid in property taxes in 2019. If your state income tax bill is the same, $8000, then you will have paid $14,060 in SALT and be able to deduct only $10,000 so you have $4060 you miss in deductions.  Provided there are no changes to the tax bill that increases SALT deductions.

 

The question you want to answer is do you want to have deductions left on the table this year or next year if the laws do not change? Personally, I will only pay the first half taxes this year and see if there is some political deal to revise the SALT deductions for 2019—I doubt there will be but we never know since there will be a new Congress starting in January.

 

Repeating my disclosure: I am not a tax professional. Before making any decisions regarding our taxes please consult with your tax preparer.

 

If you own property I strongly recommend you have two professionals assist you: a family law attorney to help you establish an estate plan with a trust and a professional tax preparer to ensure you are maximizing your tax opportunities as well as able to provide advice when needed.

 

If you have any questions on property taxes please do not hesitate to contact me and I will assist you the best I can.

 

If you, or someone you know, do not currently pay property taxes I am very willing and able to speak with you about how you can purchase property and become a homeowner!

 

 

Have a question? Ask me!

 

Prices are still under control. Strong increases in prices are still anticipated by many economists and analysts, as they have been for the bulk of the year, but have yet to manifest in the market place as inflation still remains under 3%. After dropping 0.1% in August, the Producer Price Index rose 0.2% in September and year over year wholesale prices are up 2.6%, the increase was in goods and services as food and gasoline prices both dropped nationally in September. On the consumer side the Consumer Price Index increased 0.1% in September, less than anticipated and slower than August’s increase of 0.2%. Year over year consumer prices are up 2.3%, a drop from August’s 2.7% annualized increase in prices. The most significant push on higher prices in September were higher costs for renters and home owners. Good news in the report was the after inflation wages for workers rose 0.3% in September and year over year are up 0.5%. The report is the basis for 2019 CPI adjustments for the government and it has been reported that social security benefits will increase 2.8% next year. Over all the price news is neutral for mortgage rates.

 

Rates for Friday October 12, 2018: A see-saw week for mortgage rates this week as investors ran to and fro with their money reacting to Fed-speak and speculation the Fed will increase rate by one-half of one percent (0.5%) in December instead of the anticipated one-quarter of one percent (0.25%) and have four rate increases next year instead of three. As well the drop in stock prices this week caused many investors to put some of their proceeds from selling their equity holdings into bonds—though it appears most of the money went into cash. We have a volatile rate environment, now is not the time to float your rate or try to time a dip, lock your rate when you can. All that said, rates are down slightly after last week’s spike late in the week.

 

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

30 year conforming                                            4.75%    Down 0.125%

30 year high-balance conforming                    5.00%     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.

 

 

Is it me or does it seem like Hurricane Michael had little of the pre- and post-landfall coverage that Florence received last month? Michael was the strongest hurricane to hit the United States mainland in over fifty years and the power of the storm is very evident in the pictures we are now seeing. Whole groves of trees snapped in half, houses not only flattened but blown completely away. The devastation looks more like a tornado than a hurricane, but with a significantly larger impact area. Several times a year it seems I post this link in the WR&MU, here it is again, if you are able please make a donation of any size to the American Red Cross who does incredible work assisting those impacted by disasters.

 

Have a great week,

 

Dennis

ORIGINAL POST 12-22-17: Should I pay my 2nd Half property taxes now?

 

 

Question of the week:  Should I pay my second half property taxes due in April now?

 

Answer:  This great question came to me from my brother in-law (who by the way makes the perfect Old Fashioned with home grown blood oranges) who was inquiring about paying his second half taxes to Orange County before the end of 2017 due to the new federal tax regulations that go into effect in 2018.

 

I consulted with CPA’s extraordinaire, Lew Finklestein and Paul Scholz, for input on whether it makes sense given the new tax regulations for California property owners to pay their entire taxes due by the end of 2017 instead of waiting.

 

Yes, no, maybe. You know, the standard answer to most Questions of the Week.

 

I will preface this response with this very strong recommendation: before taking action on taxes always consult your professional tax preparer.

 

A quick look at why this question is important. The tax bill passed by Congress and signed into law today by President Trump has as one of its provisions a limit on deductions on your tax filing of $10,000 for State and Local Taxes (SALT). In California, and other states, where residents pay high SALT this regulation will reduce the deductions taken in the past when all such taxes were deductible on many tax returns (see next paragraph).

 

The primary consideration as to pre-paying the second tax installment is whether or not you will likely end up in the Alternative Minimum Tax zone for 2017 when preparing your federal taxes next year. If you it appears likely that you will be subject to AMT you may not have any deduction for the property taxes paid in 2017. Consulting with your tax preparer s/he may give you a good indication of whether you may be subject to AMT and advice on the property tax payment.

 

If you are not subject to AMT in 2017 then you should very much consider making that second half tax installment, especially if your state income and property taxes exceed $10,000. With the current policy of being able to deduct all SALT payments (depending on AMT) you will enjoy full deductibility of the second half taxes in 2017 whereas in 2018 you may not.

 

Again, before making such a decision and making the payment consult your tax preparation professional. I am not a tax preparer or CPA and the information above is for you to consider and prompt you to consult with a tax professional.

 

Thanks Dave for a great question.

 

Have a question? Ask me!

 

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

 

Data doesn’t take a holiday. While many businesses slow down a bit this time of year, economic data never slows down—the economy might but the data reporting the slowdown is constant. Because of this we have a couple of very important pieces of data that tell us how the economy is doing. Yesterday we had the third and final estimate for the 3rd Quarter Gross Domestic Product which showed a solid 3.2% growth for the quarter—the second quarter in a row with over 3% growth. Consumer spending is generally considered to be 60 to 70% of our economy, and it rose only 2.2% in the 3rd Quarter. The 3.2% growth in the quarter is most strongly attributed to very strong growth in non-residential fixed investment (companies, mainly, investing in real estate, capital assets like tools and machinery), which portends well for future job growth. Strong GDP growth is generally bad for mortgage rates, but the market had anticipated the data and there was little reaction.

 

Personal income and spending news today for November was somewhat positive. While personal income was up a modest 0.3% for the month, tamped down by a reduction in government transfers for the month to offset a very good increase of 0.4% for salaries and wages. The increase in income transferred to spending as consumer spending was up 0.6% for the month. With spending up more than incomes we saw a strong 0.3%  slow down in the personal savings rate, which came in at 2.9%–the lowest in a decade. We continue to get disappointing news on inflation, the “core” rate (prices less food and energy) used by most to gauge inflation was up only 0.1% for the month and 1.5% from November 1.5%, well below the target rate for the Federal Reserve when making monetary policy. The data is mixed in regards to impact on rates as the low inflation numbers should support lower rates, higher consumer spending and income should lead to higher rates.

 

 

Rates for Friday December 20, 2017: We saw a spike in rates after the passing of the tax reform earlier in the week and today we barely have made it back to pre-vote rates, mainly thanks to the long holiday weekend and investors parking their funds in the safety of bonds and mortgages. As result Friday to Friday no change in rates.

 

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.

Yesterday we celebrated the lovely Leslie’s birthday at one of her, and our daughters’, favorite places: Disneyland. What a great way to get in the Christmas spirit. Decorated beautifully, the park was filled with visitors wearing their Santa hats, holiday Mickey ears, and Christmas sweaters. As usual there were little kids with big smiles and bright eyes. It was a bit chilly but the occasion of celebrating Leslie’s big day and the season kept us a bit warm.

 

Merry Christmas and full stockings to all!

 

Have a great week,

 

Dennis

 

 

 

10-5-18: How does the Federal Reserve impact mortgage rates?

Question of the week:  How does the Federal Reserve impact mortgage rates?

 

 Answer:  Indirectly.

 

Long time readers of the WR&MU know I mention the Federal Reserve, aka the Fed, a lot in updates, usually in the section covering news of the week that impacts mortgage rates. Whenever the Fed changes rates I usually get inquiries from different sectors of my life as to what it means for mortgage rates. This week the Fed raised its Federal Funds Rate by 0.25% and at two different meetings subsequent to the rate increase I had conversations regarding what it means for mortgages.

 

Before we cover the impact that the Fed has on mortgage rates let’s cover what rates the Fed does impact directly. There are two interest rates that are directly associated with the Federal Reserve and the Fed does not directly control either. The Federal Funds Rate is the rate at which member banks charge each other for over-night loans so they can cover their required minimum reserves, the Federal Discount Rate is the rate at which the Fed loans money over-night to member banks so they can cover their reserves.

What reserves? Depending on its size a bank in the United States must retain either 10% of their total deposits (banks with more than $122.3 million in deposits) or 3% of their deposits (banks with $16 to $122.3 million in deposits) in their banks. If a bank slips below this requirement due to making loans that total more than the either 90% or 97% that can be out in loans, the bank must borrow money to add to its reserves to meet the requirement. The bank can either go to the Fed’s discount window and borrow the needed funds, or it can borrow the funds from another bank that has reserves above the reserve requirement. Depending on whether it goes to the discount window or another bank will be determined by the rate each is charging.

 

How are those rates set? The Federal Reserve sets the rate it charges at the discount window, and this changes daily based on the market, demand and objectives of the Fed as to what it wants to do with its assets—loan them out to member banks or retain them for its own reserves. The rate that gets all the publicity is the Fed funds rate, the rate banks charge each other to lend money over-night.

 

This week the Fed was in the news and it was reported that the Open Market Committee of the Federal Reserve (aka the FOMC) raised the Fed funds rate by 0.25% (one-quarter of one percent). So to the casual observer with some knowledge of the Fed the presumption is that the Fed is telling its members that it must increase the rate it charges other banks to borrow money over-night by 0.25%. Somewhat accurate, but not entirely. What the FOMC announces when it “increases” rates is the target rate it would like to see banks charging each other, but the actual rate is determined by supply and demand each night and what lending banks are willing to charge and what member banks are willing to pay.

 

Confused? Example: Fred’s Bank at the close of the day has $150 million in deposits, but only $15 million in reserves on hand, it is short $1 million to meet the reserve requirement. Fred’s Bank’s reserve requirement manager goes on-line and sees the Fed is willing to lend the million dollars over-night at a rate of 2.25% (the Fed discount rate), the manager then checks the member bank website and sees that Jane’s Bank, which also has $150 million in deposits but $19 million in reserves, or $4 million above the requirement, is willing to lend one million dollars over-night for 2.23% under the Federal Funds agreement between member banks. The manager at Fred’s Bank can save 0.02% borrowing from Jane’s bank and initiates the transaction. In reality the amount borrowed over-night is in the billions, tens of billions so the savings for small differences such as 0.02% become pretty big.

 

The only rate set by the Fed is the discount rate it charges for over-night loans, but it influences the funds rate by making a strong suggestion to member banks as to what rate it would like see them use for making over-night loans. The two are usually very close, but again determined by the market.

 

Back to our question, how does the Fed impact mortgage rates?

 

As you can see there is no consumer rate that the Fed manages or dictates. However, but by impacting the rate at which banks can borrow money it is also impacting the rate at which banks will loan money to consumers. If a bank can make enough loans so that it is constantly below the reserve requirement, borrow money from the Fed at 2.25% to cover the required reserves and then lend the money it is borrowing at 2.25% to clients at say 5.25% it is making 3% on the money it is borrowing.

 

The 5.25% in my example is what the current prime rate is after the Fed rate increase last week. This impacts homeowners with Home Equity Lines of Credit directly, and the increase in the prime rate was a direct result of the action by the Fed’s Open Market Committee to raise its target for the funds rate.

 

However, long term mortgage rates, the 30-year fixed rate the majority of borrowers obtain, is not impacted by the FOMC decision. Directly.

 

Indirectly, the Fed’s move impacted mortgage rates months ago. And the current actions, and statements, by the Fed are impacting future mortgage rates. How?

 

Mortgage rates are determined by the open market. Investors, and think hundreds of billions of dollars daily, have many choices to make that balance their desire for high returns for their funds and minimizing risk that those funds will decline in value due to the wrong investment decision. Investors are also gamblers. They are constantly research the economy, markets, industries and hundreds of other factors with the sole objective of trying to predict what will happen tomorrow, next week, next month and next year. Based on their information they make the decision to invest in equities, aka stocks, which means you own part of a company; or fixed rate assets that pay a specified rate of return for a specified period like bonds, or mortgages.

 

The most basic piece of information to determine whether to invest in equities or bonds is information that shows how the general economy is doing. If the economy is doing really well, or looks like it will be doing really well, money will go into stocks, causing stock prices to increase, and money will go out of bonds and rates will go up. Why? If the economy is doing well companies will earn more money and therefore be worth more in the future, investors are buying today, low, and looking to sell in the future, high. They leave fixed rate assets like bonds because as the economy improves rates will increase so the rates they are fixing today by buying a bond will be worth less money in the future after rates increase. Conversely, if it appears the economy is slowing down, or contracting, investors will sell equities as companies will be earning less or be losing money in the future, and buy fixed rate invests instead locking in higher rates today with the presumption rates will decline as the economy declines; the higher rates they lock into today will be worth more money in the future when rates are lower.

 

Example: Investor reads the economic tea leaves and sees a growing economy. The option is to purchase a fixed rate investment paying guaranteed 4% for the next five years, or purchase a shares in a mutual fund that focusses on growth. Based on the economy growing, rates will increase so in one or two years the same fixed rate investment may be 5% or higher, or 25% more than the current return, but the money would be locked in at 4%, missing out on the opportunity for the higher rate of return. The mutual fund with companies that experience growth in strong economies is expected to return 6-7% over the next one or two years. If the investor is correct the money will be invested in the mutual fund, and then in a year or two the decision will be made with that money to either sell the mutual fund and re-invest in fixed assets now paying over 5% or leave the money in the fund. Because the 4% fixed rate is not enough to attract investors to invest the rate will increase until investors are attracted.

 

Move ahead two years and the economic growth is losing, or has lost, steam. Rates have gone up to encourage investors, which has also been a factor in slowing economic growth. The investor has made an average of 6.5% by investing in the growth fund but sees the economy has slowed. Looking at the markets there is a fixed rate bond that is guaranteed to pay 6.25% for the next five years. Knowing a bad market will cause rates to decline, and also slow the growth of companies, the investor sells the growth fund holdings and purchases the fixed rate bond. As the economy does slow down the investor is collecting a higher rate of return on the fixed asset than newer bonds coming to market are paying, as well as a lot more than the growth fund that is now losing value.

 

The Fed indirectly impacts mortgage rates as it provides a look into the future for investors as to which way interest rates are headed, often by broadcasting in advance its future intentions with rates. The rate increase last week had no impact on mortgage rates because the Fed told the world in 2017 its intention to increase rates through 2018, how often and by how much. We know that the Fed will increase its target for the funds rate by December 31st by another 0.25%, if it does then there will be no impact on mortgage rates as investors have already priced this increase into bonds and mortgages. If however, the target is increased by 0.50% instead of 0.25% mortgage rates will jump as the rate increase was higher than expected and investors will have been caught off-guard and will sell off holdings they purchased anticipating only a 0.25% increase.

 

What impacts mortgage rates is the expectation for what rates will be in the future. What rates will be in the future is determined by economic activity. This is why I include a brief economic report every week in the WR&MU, so readers can get an idea of the strength, or weakness, of the economy and from that get a good idea if rates will be going up, going down, or holding steady.

 

Even with economic activity it is still somewhat of a guessing game as at any time rates can bounce up or fall down based on national or international events. The rule of thumb for mortgage rates is bad news means low rates and good news means high rates.

 

I hope this was not too much deep in the weeds in describing the Fed’s impact on your mortgage rate, but it is hard to make a simple explanation on a somewhat complex issue.

 

Have a question? Ask me!

 

 

First Friday means jobs. On the First Friday of every month the Labor Department releases the labor statistics for the prior month. Today’s release contained a huge headline number that will cause a stir and details that need further examination. The important data is that non-farm payrolls increased by 134,000 for the month, well below the expectations of 168,000 and below the average of over 200,000 new jobs for month for the first nine months of the year. It is unknown if the lower than expected number of new hires was impacted by Hurricane Florence, or if it is signifying a slow-down in hiring that will continue. Employers are having a hard time finding workers, as indicated by the headline unemployment rate dropping 0.2% from August to 3.7%, the lowest unemployment rate since December 1969. Wages grew 0.3% for the month and are up 2.8% from last August. The news is not positive for rates. With unemployment dropping employers will need to continue to increase wages to fill vacancies, which will in turn require prices to increase to cover the higher labor costs. This can start a wage and price inflation spiral that can be difficult to control. This leads to expectations for higher rates, which puts very strong upward pressure on interest rates.

 

Rates for Friday October 5, 2018: Several months ago, I wrote about the Fed selling off its accumulation of mortgages and U.S. Treasury bonds it purchased over the years following the recession. At the same time these assets are hitting the market the U.S. Treasury is also selling short and long term debt to finance the operations of the government. With increased supply on the market, which drives down prices and rates up, plus economic data indicating there is a strong possibility of higher inflation, and therefore higher rates, it is not surprise that the U.S. Treasury 10 year bond yield is at its highest since July 2011 and that 30-year fixed mortgage rates today hit their highest levels since April 2011. There is some over-reaction from investors this week to the employment data, however when they make adjustments to their behavior, any decrease in rates will be much more modest than the increase we have seen since the end of August. Now is the time to lock in your mortgage rates.

 

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

30 year conforming                                            4.875%    Up 0.25%

30 year high-balance conforming                    5.125%    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.

 

 

 

Thanks to my wonderful wife Leslie, PR consultant extraordinaire, and her terrific team, my website is fully functional and includes past Weekly Rate & Market Updates through 2016. The posts from 2016 and 2017 will see some changes, hopefully over the weekend, as I tighten up the titles. The posts from this year are listed by date and also show the Question of the Week to help visitors find topics they are interested in learning more about. There is still some cleaning up and beautifying to go but I am excited that archives of past updates are now available.

 

To visit the website, go to www.DennisCSmith.com or directly to the page with the WR&MU history go to www.DennisCSmith.com/MyBlog .

 

Thank you to everyone who got back to me on last week’s topic regarding the Propositions on the California ballot in November, it was the most feedback I have had on a Question of the Week in some time. If you missed it click here.

 

Have a great week,

 

Dennis

9-28-18: Are there any Propositions on the November ballot that are real estate related?

Question of the week:  Are there any Propositions on the November ballot that are real estate related?

 

 Answer:  With the election just over month away, and your absentee ballot available in ten days, and the onslaught of television ads just starting, now is a good time to review some of the propositions on your ballot.

 

A brief bio break before I get into the ballot measures. I have a Bachelor of Arts in Economics and Political Studies from Pitzer College (1984) and have continued to be a student of both disciplines. My philosophy is that economics is the foundation of most personal, organizational and political decisions—if you cannot afford it you cannot do it, and if  you do the long-term consequences will generally not be positive. With that out of the way let’s look at the real estate related propositions on your November ballot.

 

There are four ballot measures that in some way involve real estate in California, Props 1, 2, 5 and 10. Here is a brief description of each and my position (if you are so inclined to care).

 

Proposition 1: Affordable Housing Bond If passed this measure authorizes the state to borrow $4 billion in bonds for affordable housing. The funds would be broken into different areas of expenditure with the largest amount being for the building and renovating of rental units. Other funds would be used to provide home loan assistance to Veterans, housing construction in densely populated areas, down payment assistance programs for low and moderate income potential homebuyers and housing development for agricultural workers.

 

Understanding that more affordable housing is needed in the state I do not feel adding $4 billion in bond payments to our budget and cycling the money through state and local bureaucracies is the way to provide more affordable housing. Supply and demand create prices, some of these funds are targeted in a manner to increase demand, which increases prices, and other funds are targeted to rather ambiguous objectives that appear to expand the power of the government in the market place. I feel that local ordinances and applying tax benefits to developers and property owners would be a more efficient way to create more affordable housing. Dumping government funds into a market has never been shown as a way to lower market prices. I will be voting No on Prop 1. I expect this measure to pass given the lack of a unified opposition and the funds coming into the “Yes” side of the ballot.

 

Proposition 2: Mental Health Housing If passed this measure authorizes the state to re-allocate funds currently directed to county mental health services across the state to fund supportive housing for those suffering mental illness. With a directive and the funding the state can make strides in providing long-term solutions to mental illness sufferers and provide blueprint for counties to help with their homeless problems. Across levels of government funds have been allocated for the homeless with no impact on the problem—it seems to be getting worse. By creating housing for the mentally ill that includes on site social services and medical services this proposition is the best solution I have seen proposed so far at any level to start to make a dent in the issue. I will be voting Yes on Prop 2. I expect this measure to pass given its purpose and how much the issue has been one of top concern to most of the state’s residents.

 

Proposition 5: Residential Property Tax Portability If passed this measure would expand the current property tax transfer rules of Props 60 and 90. Under current rules if homeowner over 55 sells their current residence and purchases a new residence of lower value the homeowner can transfer their current tax base to their new home. The portability of the current tax base is limited as only a few counties in the state allow those otherwise eligible to transfer their current tax base into their county (i.e. homeowner selling Orange County could not transfer tax to new home in Shasta County). As well the current laws allow only a one-time transfer.

 

If Prop 5 is passed the one-time transfer limit is eliminated and the purchase price of your new home does not eliminate your ability to transfer your tax base to lower your taxes if your new home costs more than the home you sold—your tax base will go up but not to market value. As well if you purchase a home for lower value than the home you sold your tax base will be lower than your current tax base. Here are two examples to hopefully clarify how the measure will work if passed.

 

Buying more expensive home:  A couple that qualifies for the property tax transfer owns a home in Los Angeles County they purchased many years ago for $110,000. Today the taxable value is $200,000 and their base tax is $2200 per year ($200,000 x 1.1% state property tax rate). They sell their home for $600,000 and purchase a new home in San Luis Obispo County for $700,000. Their new property tax base is calculated by subtracting the sales price from their prior home from the sales price of the new home and adding the result to the tax base from their prior home:

 

New home price minus prior home sales price: $700,000 – $600,000 = $100,000

Price differential plus prior home tax base: $100,000 + $200,000 = $300,000

 

The new tax base is $300,000, for annual property tax base of $3300 ($300,000 x 1.1%). Without Prop 5 the tax base would be $7700 per year (market value $700,000 x 1.1%), the homeowners are saving $4400 per year.

 

Buying less expensive home: This gets a little more complicated as the new tax base is reduced by a percentage based on the difference between the old property value and the new property value. Same couple sells same home for $600,000 with $200,000 tax base. They purchase a new home in San Luis Obispo County for $450,000.

 

New home price divided by prior home sales price: $450,000 ÷ $600,000 = 75%

Old tax base times price differential percentage: $200,000 x 75% = $150,000

 

The new tax base is $150,000 for annual taxes of $1650 per year, a savings of $550 per year over what they are currently paying.

 

I think the best tax law in America is California’s Prop 13. We pay some of the highest income and sales taxes in the country, but homeowners have the best property tax protection from the state of any state in the country. Prop 5 makes the Prop 13 even more generous to homeowners over the age of 55. Because of the over-generosity of Prop 5 I will vote No. If Prop 5 were to mirror Prop 60 and only eliminate the inability to transfer tax bases over any county lines in the state and enable more than one transfer, particularly in cases of divorce or spouse who have passed away, I would vote for Prop 5. As it is written with homeowners purchasing a new home and being able to lower their tax base to me is not equitable to the counties, state or other tax payers and is not needed. And most importantly, if Prop 5 does pass I see it as a strong rallying issue for those who want to eliminate Prop 13 or severely alter it so that higher property taxes result in the future. I expect this measure to fail.

 

Word has it that the California Association of Realtors is already working on a revision to Prop 5 for the 2020 ballot should the measure fail this year. I hope they do as I would like to see the current Prop 60 benefits available to be transferred across county lines. Were I to be asked to craft a revised proposition I would make the changes I suggest changing the calculation on purchase a new home for a higher price to increase the tax base from formula in Prop 5, eliminate ability to lower tax base by purchasing a new lower priced home, eliminated unlimited ability to transfer the tax base but enable additional transfers due to divorce and/or spousal death, and finally I would raise the age of eligibility to 60 from 55.

 

 

Proposition 10: Local Rent Control Initiative If passed this measure will roll back a 1995 law that limited the use of rent control in California (Costa-Hawkins) and enable greater ability for local government to pass, and/or expand, rent control in their jurisdictions. Costa-Hawkins disallowed cities from enacting rent control on properties first occupied in 1995 and single family dwellings (including condos and townhomes). If passed Prop 10 would enable rent control on all rental units, including single family dwellings—and room rentals inside a single family dwelling.

 

Any rent control imposed by government on landlords benefits a very narrow group of residents: those already renting. Wherever rent control has been enacted rental prices are higher than similar geographically nearby markets. Rental units are scarce in rent control communities as tenants do not move to preserve their low housing cost. Because of the scarcity of available units with a rent control unit does come on the market the landlord is able to get premium rent for the unit since there is little competition. Over time as each generation of rent controlled tenants vacate units the rents in the market climb disproportionate to the surrounding markets.

 

According to a spokesman from the California Business Roundtable there are currently 12,000 rental units across the state approved for construction. Every project is on hold until after the November election. Should Prop 10 pass the projects will not start building as the investors/builders do not want their investments to be restricted from market returns by local governments enacting rent control. I will vote No on Prop 10. I expect this measure to fail.

 

There have been many great benefits to Californians as a result of the ballot initiative process, ad many great detriments as well. It is our duty to study the issues, and candidates, presented and understand both sides before casting our ballots. I hope the above comments on the propositions involving real estate provide you with a decent perspective and spur you on to study these and the other propositions more thoroughly.

 

 

Have a question? Ask me!

 

A busy week for mortgage rate impacting news. First, and most expected, the Fed increased it Fed Funds Rate by 0.25%, as expected. The immediate result was the prime rate, and therefore rates on Home Equity Lines of Credit, also increase 0.25%. Prime rate is now at 5.25%, up one percent from one year ago. The Fed announcement also indicated it is sticking to schedule of one more increase in rates this year and three next year. The news is mortgage rate neutral since the rate increase was expected and the Fed did not announce they anticipate more increases than previously announced.

 

Second quarter Gross Domestic Product went through its third and final evaluation and there was no revision made to the prior revision putting the growth for the quarter at 4.2% annualized. With no change to the growth number there was no impact on mortgages.

 

Last Friday of the month gives us important data on consumers as personal income, consumer consumption and inflation data are released. Good news on all fronts for mortgage rates as personal income matched last month’s increase of 0.3% and the core inflation rate dropped from 0.4% in August to flat this month—meaning those higher wages will go further. Consumer increased spending by 0.3%, lower growth than previous months but still the sixth month in a row of positive spending growth and the eleventh of the past twelve months and 3.8% overall gain in spending from last year. Overall the news should be somewhat negative for rates as it shows economic strength is continuing and should continue through the third and fourth quarters absent some catastrophic event.

 

 

Rates for Friday September 28, 2018: Intra-week rates had a bounce up and then down and the result is the conforming rate is flat from last Friday and the high-balance rate is down slightly for the week. Many analysists are hinting at a possible decline, very small decline, in rates in the next week or so; however, this analysist is not convinced of the underlying factors that would make a such a prediction a strong one.

 

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

30 year conforming                                            4.625%    Flat

30 year high-balance conforming                      4.75%     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.

 

 

I have a pretty strong background in politics and economics, which perhaps comes through in my WR&MU. My mom grew up in a very politically connected household in Sacramento. Her father was an attorney and lobbyist and her mother was socially active in political circles. My mother continued the family behavior. When my sister, brother and I were growing up we did so with campaign pins and bumper stickers, meet-and-greets with candidates and seeing our mom very briefly on the television from the 1968 Republican National Convention in Miami.

 

Growing up my goal was to become and attorney like my grandfather and both uncles and I majored in economics and political studies in college. My study habits my last few semesters were not great so I put law school on hold to get some discipline. I started earning money, found the mortgage industry and law school was permanently in the rearview mirror. However, my interest in the two disciplines that comprised my major has never left me and I continue to study and read history, economics and political books, articles and journals. For those wondering, the basis of my personal philosophy is that economics is the overwhelming factor that influences politics and therefore history, be it within a family (microeconomics) or nation (macroeconomics). As I often say, take care of the economics and most other issues sort themselves out.

 

Whatever your interest I hope you are able to spend personal time daily, weekly, monthly to indulge in your interest and continue to expand your scope of knowledge and understanding.

 

Have a great week,

 

Dennis

9-21-18: Should we refinance and use proceeds to payoff debt?

Question of the week:  Should we refinance and use proceeds to payoff debt?

 

 Answer:  Not if you can payoff your debt without tapping into your equity.

 

With rates still low many families are looking at their accumulated consumer debt and wondering if they should refinance, or get a home equity loan, to payoff their debt and lower their monthly credit payments. Being able to get a rate for a cash-out refinance possibly somewhere around 5% for a 30 year fixed rate mortgage seems better than paying high, possibly as high as 20%, on credit cards. But is it a good idea?

 

On paper, the math seems really good, but a deeper look shows it probably is not for most families.

 

Take a scenario where you have a home worth $550,000 and you have a balance of $365,000 on your current mortgage with a rate of 3.75% and your payment is $1850 with about 25 years left on the loan. You do not intend to move anytime in the future as your kids are in, or just about in, middle school.

 

For various reasons, some emergency, some just consumer spending, you have accumulated about $35,000 in revolving debt (credit cards) with minimum payments totaling about $700 per month, have a few collections from past medical expenses for another $2000, a car payment of $560 with a balance of $20,000 and you need to replace your roof which will cost about $20,000. You have about $10,000 in savings and are making maximum contributions to your retirement accounts. You have been trying to pay down your credit cards but have not seem to be able to make a dent in the total balances and are at the stage where you make minimum payments and pay off most of what you charge each month.

 

Recapping, you have about $57,000 in debt costing you $1260 per month in minimum payments, this includes collection accounts with no payments being made, and you need about $20,000 for a roof. Should you either refinance and add $77,000 to your mortgage or get a home equity line for close to that amount, to payoff all your debt, fix the roof and start over with only a mortgage payment? To do so would require about $442,000 for a mortgage balance, or your current mortgage with a home equity line.

 

We would want to keep your new loan amount at or below 80% loan to value, which would be a new mortgage for $440,000, a bit short of what you require but you would be able to pay that off quickly with your new financial obligation shift.

 

Taking a look at a new mortgage of $440,000 for a cash-out refinance at 80% loan to value you would be looking at a rate of about 5% depending on credit score and other factors. This would make your new mortgage payment about $2350 per month, or $500 more per month than what you are spending now on your credit obligations plus replacing your roof. With the new loan and $500 per month higher payment you are getting rid of $1260 in monthly payments for a net savings of $760 per month.

 

Sounds pretty good, payoff debt, get a new roof and save $1260 per month. But is this something you should do?

 

Scenarios I run by clients before initiating the application for such a debt-relief refinance are as follows:

 

Reconsider including your vehicle loan in any debt consolidation scenario. Auto loans are generally lower rates than credit cards, and in the past several years with decent credit rates below mortgage rates. They are also fully amortized, meaning with every payment you are paying down the loan balance until it reaches zero. In the above scenario, you have about three years left on the loan and you are paid off. If you include it in a mortgage refinance you will be paying for the car as part of a thirty year mortgage. Taking the loan out the new mortgage balance would be $420,000, your payment on the mortgage would drop to about $2245. You would now have a mortgage payment that is just over $400 per month higher than your current mortgage, you are paying off debt with payments of about $700 month for net savings of $200 plus have funds to replace your roof.

 

Consider a home equity line of credit (HELOC) instead of refinancing your mortgage. The rate will be higher, and adjustable with it going up the next few years, however you will have the opportunity to save on monthly payments, or not depending on how you handle the repayment of the HELOC. If you go this route, you obtain a HELOC for $50,000 (following advice above and leaving vehicle loan out of the consolidation plan) at a rate of Prime plus one-half of one percent. Prime is at 5.00% today giving you a rate of 5.5% on the HELOC. The minimum payment for most equity lines is interest only, in this case that would be about $230 per month which looks like a big savings over what you are paying now—and that is the debt trap. If you pay interest only you are in worse position than you are now. Yes, your monthly cash flow is better but you are making no reduction in the balance. If you get a HELOC my very strong recommendation is you continue making the same total of payments you were making before, except instead of paying minimum payments on credit cards you are paying down your HELOC balance. Currently you are paying $700 on the cards, so pay $700 on the HELOC, this will decrease the balance $470 per month at the current rate. If the rate never changes and you make $700 per month payments you will have the HELOC paid off in about seven years. However, the rate will very likely be going up at least one percent in the next year, and perhaps more in the future. When calculating long term HELOC rates I usually use an average Prime rate of about 8% to be safe, at this average rate and a payment of $700 per month your time frame to payoff the loan for your credit card debt and roof repair is about eight years.

 

Equity lines often have balloons. One factor to consider with the equity line is the repayment terms. Many are “open” for ten years, meaning you can reuse them as the balance is paid down/off, and during this period they require only interest only. After ten years HELOCs are either fully amortized for the remaining term, or are due with a balloon payment. Because of the change in terms later in the loan it is important to have a payoff plan on the HELOC when you obtain it so you are not in a position in the future where you need to potentially refinance again in the future.

 

Create a realistic plan to payoff you consumer debt yourself and just borrow to pay for the new roof. Make a very realistic budget of your net income and expenses, including debt payments. See what adjustments you can make to your lifestyle and how much those adjustments will save you per month. Take the savings and dedicate them to paying off your credit cards. Many years ago, before Dave Ramsey became a multi-millionaire by counseling families on paying off debt I would help clients with debt payoff plans that pretty much matches Ramsey’s plan. I called my plan Stop, Drop and Roll. Stop using credit. Drop your credit card balances one at a time, starting with the lowest balance. Roll the payments into the next lowest card when one is paid off. It takes commitment to the payments and whatever austerity measures you put in place but if followed will enable you to payoff your consumer debt without refinancing your mortgage and adding tens of thousands of dollars and years to your existing mortgage.

I am in the debt business, a mortgage after all is a debt—the largest debt for almost every homeowner. If you are feeling overwhelmed with your debt please contact me and I can help you, at no obligation or cost, work through options for paying down/off your credit obligations.

 

 

Have a question? Ask me!

 

August home sales are a bit of a mixed bag. While the total number of sales are down in the state from last year prices continue to rise and days on the market are stretching out in most areas as inventory on the market has grown for the past five months. Looking at the data it looks like the market is trending towards equilibrium between buyers and sellers after we have experienced several years of a sellers’ market. Statewide total sales in August were down 1.8% from July and off 6.6% from August 2018. The statewide median price, $596,410, is up 0.8% for the month and 5.5% from last year. Sales and prices locally are in line with the statewide direction on prices and units sold. In LA County, the median price in August was $607,490, up 1.7% from July and 6.4% from last August, the total number of sales were up 5.5% for the month but down 8.9% from last year. Orange County’s median price in August of $838,500 was 1.1% jump from July and 6.3% increase from 2018 with total sales showing 2.9% drop month to month from July and a 9.7% fall from 2018.

 

 

 

Rates for Friday September 21, 2018: Rates are up from last Friday as investors put money into the equity markets (i.e. stocks) and hedge against next week’s Federal Reserve Open Market Committee meeting—these are the folks that set the Fed rates that impact consumer rates, such as the prime rate that determines equity line rates. The Fed will bump their funds rate by 0.25%, that is expected and priced into the markets. Hedging is occurring because of what the FOMC members say about the future of short term rates, how many future increases, how soon, how high? While they will not directly answer these questions those who can read the Fed tea leaves will discern much from the minutes of their meeting. The consensus appears to be that the Fed will raise rates faster and higher than previously thought. Lock your rate when you can!

 

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

30 year conforming                                            4.625%    Up 0.125%

30 year high-balance conforming                      4.875%     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.

 

 

Long time readers of the WR&MU know I can be a bit of a data geek…well more than a bit. So I found it interesting that the link to the Waffle House index last week had one of the highest click rates I can recall from readers. For those in Southern California the nearest Waffle House is in Goodyear, Arizona, 337 miles away from the Smith abode in Long Beach. There have been plenty of trips home in the family van from Scottsdale that have begun with breakfast at Waffle House, but have not been to the one in Goodyear as I recall. I do love me some waffles!

 

Looks like a perfect fall weekend, which commences tomorrow (fall and the weekend) in Southern California with great weather, playoff implication baseball plus college and pros going at it on the gridirons. Enjoy your weekend and the first days of fall!

 

Have a great week,

 

Dennis