It’s Time to Get Fiscally Fit
Homebuyer Tax Credit Lives
Bill Starrels • November 3, 2011
On November 6th, 2009 The Worker, Homeownership and Business Assistance
Act of 2009 was signed into law. The law extends and expands the first-time homebuyer credit allowed by previous Acts. Highlights of the new law include the following:
– Extends deadlines for purchasing and closing on a home.
– Authorizes the credit for long-time homeowners buying a replacement
– Raises the income limitations for homeowners claiming the credit.
Under the law, an eligible taxpayer must buy or enter into a binding contract to buy a principal residence on or before April 30, 2010. Closing on the home must take place no later than June 30, 2010. Taxpayers on qualifying purchases made in 2010 have the option of claiming the credit on either their 2009 or 2010 tax return.
Long-time homeowners who purchase a replacement principal residence may also claim a homebuyer credit of up to $6500 for married couples or $3,500 for single filers. The homeowner must have lived in the principle residence for no less then five of the last eight years ending on the date the replacement home is purchased.
Another enhancement to the legislation includes
higher income limits for homes purchased after Nov. 6. The credit phases out for individual taxpayers with modified adjusted gross income (MAGI) between $125,000 and $245,000 for joint filers. The existing MAGI phase-outs of $75,000 to $95,000 or $150,000 to $170,000 for joint filers still apply
to purchasers of home on or before Nov. 6.
The maximum purchase price of the home under the new rules is $800,000.
Additional information includes:
– Credits apply only to homes used as a principle residence by the taxpayer.
– The credit will either decrease a taxpayer’s bill or increase their refund dollar for dollar.
– Is fully refundable, and will be paid out to eligible taxpayers even if they owe no tax or the tax credit is more than the tax owned.
The homeowner does not have to pay back the tax credit unless the home ceases to be their primary main residence within a three-year period following the purchase. This means the home cannot become a rental property or a second home during the three-year period.
According to statistics from The National Association of Realtors upwards of 350,000 homes were sold as a result of the homeowners tax credit legislation, and upwards of 500,000 additional home sales are anticipated as a result of the new legislation. With the extension and expansion of the legislation, this continues to be an excellent time to purchase a home.
Bill Starrels lives in Georgetown and is a senior mortgage loan consultant. He can be reached at 730-625-7355 or [firstname.lastname@example.org] (mailto:email@example.com).
Rumblings at the Federal Reserve
There was a shot across the bow in the financial markets on Feb. 18, when the Federal Reserve raised the interest rate it charges banks for emergency loans.
The markets reacted predictably to the news. The bond market sold off with the yield on the 10-year treasuries, moving to 3.8 percent, a level not seen since late last summer. Mortgage interest rates, which follow the lead of the 10-year treasuries, also moved higher.
Earlier in the day, rates for conforming 30-year fixed rate loans were around 5 percent with no points. By the end of the day the same rate commanded three-fourths of a point more in fees. The rates on 15-year fixed rate products essentially moved 12.5 percent higher in rate.
Similar moves were seen in government-backed mortgages, otherwise known as FHA or VA loans. Rates essentially were an eighth higher then before the Federal Reserve’s actions.
The slight tightening reminded people that the Fed is looking forward to exiting some government-sponsored programs and future tightening of interest rates.
The Fed still views the overall economy as recovering from the severe recession, but highlights that the economy is still not strong. Until the economy proves that it is in much stronger condition, the Fed is not likely to do any broader policy hikes.
Some called the reaction to the Fed’s decision overblown and highlighted the rise in the discount rate of .25 bps was not reflective of the economy as a whole and was a normalization of some aspects of the credit markets.
Remember, Wall Street loves volatility. One has to keep in mind that traders make money when markets move.
Most economists still think true tightening by the Feds is a ways off. Most are calling for tightening to begin no earlier then 2011. Others think the tightening may further down the road. The bottom line is the economy has to show stronger signs of economic strengthening before rates are raised.
Mortgage interest rates will eventually rise, but presently remain low. It is still an excellent time to refinance or purchase a home. The Federal tax credit for buying homes is still in place. House prices remain low compared with prices of a few years ago. As we all know, what goes down eventually moves back up.
Bill Starrels lives in Georgetown. He is a mortgage loan consultant. Contact him at 703-625-7355 or firstname.lastname@example.org.
The State of Mortgages
-Mortgage rates remain in a narrow and favorable range. In recent days, rates for 30-year fixed-rate mortgages as gauged by Freddie Mac averaged below 5% percent again. This means for a primary house mortgage with at least 20 percent down and very good credit, rates are quite attractive. Interest rates on government insured FHA and VA mortgages were slightly higher.
Fifteen-year mortgage rates typically carry rates that are around a half to three-eighths lower then typical 30-year rates.
Interest rates on adjustable rate mortgages that have fixed terms of three, five and seven years were approaching a rate of 4 percent.
The turmoil in the European markets produced instability in stock markets worldwide. When stock markets falter, investors put money into safer investments, which include the bond market. When bonds do well, so do interest rates. The yield on the 10-Year Treasuries was testing the 4 percent level before the turmoil in the stock markets. The yield for 10-Year Treasuries is now in the 3.5 percent range. The “flight to safety” should continue for at least the short term.
Inflation or the fear of inflation is the major driving force for a rise in interest rates. There is little fear of inflation, nationally or globally. Some economists state that the long-term trend in inflation globally is titled in the direction of less inflation or even deflation.
In the short term, there is no doubt that inflation is well under control and there is no fear of inflation rearing its head.
If the European Union slides towards recession, then there will be no chance of interest rate rises by the Federal Reserve in the foreseeable future.
Employment is starting the long road back to recovery. Jobs are starting to increase. However, more people are coming back into the job market, looking for jobs. That is why the unemployment rate rose to 9.9 percent, even though there was healthy job growth. There is a lot of work yet to be done.
Underwriting standards remain strict. This means a loan has to be well documented with all the income and asset statements. If there is a gray area on a loan, the underwriter will cast doubt instead of giving the benefit of the situation. Mortgage loans are available, but the client has to be well qualified.
If you are in the market for a mortgage, this can be a good time for you. Rates are low and as long as you can meet the underwriting criteria, you should end up with an excellent mortgage.
Bill Starrels lives in Georgetown, specializing in residential mortgages. He can be reached at 703-625-7355 or email@example.com.
The Markets are Volatile
-The roller coaster ride in the financial markets continues. Some of the swings are good for interest rates — some are not so good. At best, it is a nerve-racking time for anyone who is watching their investments.
The severe economic problems in Greece precipitated a flight to quality — a rapid switch by investors to less risky investments such as gold or bonds — in the markets. Investors sold off stocks in a large way. The Standard and Poors 500 index has had a wild ride in the last few months. The index topped out on April 23 at 1,217 points, and on May 25 dipped to 1,025 — a swing of 16 percent.
The 10-Year Treasuries on April 23 yielded 3.82 percent, just shy of its high watermark on April 7, when the yield was 3.86 percent. On May 25, the yield dipped to 3.16 percent.
The London Interbank Offer Rate (LIBOR) index, to which many adjustable rate mortgages (ARMs) are tied, spiked to 1.016 percent in May from a low of 0.846 percent in February. Most adjustable rate mortgages add a margin of 2.00 percent to the index that gives the mortgage holder their newly adjusted interest rate. This means those newly adjusted ARMs would be around 3 percent. These rates are still very low by any standards.
This is a good time to be educated on locking and floating interest rates. When you take out a mortgage for a purchase or refinance mortgage you have to choose when you want to lock in your interest rate. You can lock it in at the time of application on a refinance (though on a purchase loan you need to have a contract in place). The lock exploration can be anywhere from 30 to 90 days. If your settlement date on a purchase is 45 days out, then you need a 45-day lock.
Once you decided to lock in, the rate will not go up or down during the lock-in period. If you locked for 45 days at 5 percent with no points, this will not change during the 45-day period.
If your lock expires before the settlement can be completed, then the lock has to be extended. If the “new” rates are higher then the “original” rate, then the “worst case” scenario is used. In this example, if 5 percent now costs a half point, then the new rate will be 5 percent with half of a point. If rates are lower when the lock expires, then the original lock is used. So if the “new” rates are 4.875 percent with no points, the customer does not get the lower rate. They would have to stay with the 5 percent rate.
Sometimes rate locks can be extended before the locks expire. There is no advantage in letting a mortgage lock expire. The only time the newer rates can be used is if the rate has expired and over 30 days have elapsed.
During this period of turbulence, interest rates have gone lower, which has caused a lot of customers to question if it is a good time to lock in or if they should look for even lower rates. Those who were locked in questioned if they could float down to a new, lower rate.
On rare occasions a float down can be accomplished. For this to happen there has to be a very significant drop in rates that allows for an adjustment to be made. The bank has to add on some additional pricing so it does not lose money on the adjustment. The usual outcome is the prevailing rate, plus 1/8. The latest fluctuation in rates was not enough for a float down to be triggered.
During these periods of market instability, instead of trying to time the markets, jump on rates when they tick down. If you are offered a fixed rate with a “4” in front of it, be happy. Remember that rates generally rise faster than they fall.
Bill Starrels is a mortgage loan officer who lives in Georgetown and specializes in refinance and purchase mortgages. He can be reached at 703-625-7355 or firstname.lastname@example.org.
Rent or Buy?
-With mortgage interest rates low these days and the rental market in the Georgetown area stubbornly high, many prospective renters are taking the time to examine if the time is right to purchase a property.
Rates on mortgages range from around 4 percent for adjustable rate mortgages to 5 percent or slightly higher for fixed rate conforming mortgages. A conforming mortgage is a mortgage backed by Freddie Mac or Fannie Mae, which can range up to $729,000 in Washington, D.C. The District is a high-cost area that allows for this high mortgage limit.
Rates are about the same for government-backed FHA mortgages. Loan limits for FHA loans also go up to $729,000 in the District.
The required down payment, if the house is a primary or second home, ranges from 10 percent on conventional mortgages to as little as 3.5 percent on FHA-backed mortgages.
What would the payments look like? Per every $100,000 borrowed at 4 percent, the payment would be $477 a month for a principle and interest loan. The payment on an interest-only would be even lower: $333 a month. These figures do not include taxes or insurance.
Appreciation is another motivation for buying instead of renting. Georgetown area real estate has held up well during the Great Recession. A lot of real estate watchers think that prices have stabilized and prices will likely go higher over the next few years.
Tax incentives are another motivator. The mortgage interest deduction is alive and well in America. One can deduct the mortgage interest expenses on a primary or secondary home. Investment properties also have a lot of tax advantages. In recent years, parents of some university students in Washington have even bought houses instead of paying rent for their sons and daughters.
If one buys a house for their son or daughter and rents other parts of the home to four or five other students, it is not too hard to produce adequate, after-tax cash flow. If a mortgage is around $4,000 a month and one has four renters, in addition to their son or daughter living on the property, the numbers can work. This is one of the reasons for the number of rental houses around area universities.
Up until a few years ago one could buy a house in the Georgetown area and in four years sell the home at a handsome profit. The days of a guaranteed profit have not yet returned.
If the money for a down payment and closing costs is not a problem, then buying a house can be a smart alternative to renting. Even amid a volatile stock market, Washington area real estate is stabilizing, which makes putting money into local real estate an attractive option.
As one should do when looking at any other investment, consult your financial professional when making this type of decision.
Bill Starrels lives in Georgetown. He is a mortgage loan officer who specializes in purchase and refinances mortgages. He can be reached at 703-625-7355 or by e-mail at email@example.com.
Interest Rates are Moderating
-Not that long ago, the talking heads on CNBC and other cable shows were talking about the inevitable rise in interest rates. Virtually all were calling for the 10-Year Treasury to be well north of 4 percent by this summer. Mortgage rates were forecasted to head to 6 percent, and like many weather forecasts, these predictions were simply wrong.
Instead of the 10-Year Treasury notes rising beyond 4 percent, rates on the T-bills have been falling. Most mortgage interest rates touched new lows in recent days.
The stock markets are in a state of flux because of worries about the overall economy. Recent numbers on the American economy, along with news reports on the instability on European markets, has led to a sell-off in stocks and a flight to safety. Bonds are considered a safe harbor for money. When bonds do well, generally mortgage rates go lower. So in a depressed stock market, rates trend lower.
New home sales reported on June 23 showed a very steep decline. Sales were down 32.7 percent over the previous month — only 300,000 sales versus 446,000 in April. The year-over-year numbers were also down by a sharp 18.1 percent.
Reasons for the sharp drop in sales are attributed to the slow economy and to the expiration of the homebuyer tax credit. The tax credit enabled buyers of homes to receive tax credits from $6,500 to $8,000. It seems that the tax credit precipitated a front-loading of sales. Some buyers, who would have bought in coming weeks, accelerated their purchases in order to take advantage of the tax credits.
The government lowered its estimate of how much the economy grew in the first quarter of the year, noting that consumers spent less than it previously thought.
The Commerce Department says that gross domestic product rose by 2.7 percent in the January-to-March period, less than the 3 percent estimate for the quarter that the government released last month. It was also much slower than the 5.6 percent pace in the previous quarter.
The good news in the GNP numbers is there have been three consecutive quarters of positive performance in the economy. The economy is clearly climbing out of the recession. The climb may be slow but it is positive.
At its Open Market Committee meeting, the Federal Reserve made no change to its policy language following the June 22 and June 23 meeting, reaffirming that interest rates will remain “exceptionally low for an extended period.” Most economists now think the Fed will keep on hold any interest rate changes well into 2012.
Bill Starrels is a mortgage loan officer residing in Georgetown. He can be reached at 703-625-7355 or by email at firstname.lastname@example.org.
Rates Are At Record Lows
-In a July 22 release by Freddie Mac’s Primary Mortgage Survey, the 30-year and 15-year fixed-rate mortgages reached record lows. The survey for 30-year fixed-rate mortgages began in 1971 and for the 15-year began in 1991.
The average fixed rate for a 30-year mortgage was 4.56 percent with around one point. The average for the 15-year mortgage was 4.03 percent with a 1 percent origination fee.
Adjustable rate mortgages (ARMs) also saw new lows. The average for a five-to-one ARM was 3.79 percent with a 1 percent origination fee.
One year ago the averages were substantially higher: 5.20 percent on 30-year fixed, 4.68 percent on 15-year fixed and 4.74 percent on 5-year ARMs.
Besides the significant fall in rates, another item of importance is the new spread between ARMs and fixed rate mortgages. A year ago, a five-to-one ARM was actually more expensive then a comparable rate on a 30-year fixed-rate mortgage. Today an ARM carries a significantly lower rate of around 80 basis points.
Folks with ARMs that are adjusting now will end up with fully adjusted rates around 3 percent. This would be for “A” paper loans. ARMs for less credit-worthy clients would adjust higher.
The interest rate nadir is due to a combination of weakening confidence in the economy which causes a flight to safer investments. Another factor is the lack of inflation and the prospect of deflation. These factors ultimately drive interest rates lower.
Last week, Federal Reserve Chairman Ben Bernanke testified before Congress, stating that the “Fed expects a gradual recovery to continue, and it believes the current policy stance is appropriate to support a recovery.” Translation? The Fed is not changing rates any time soon. There will be small likelihood of a rate hike well into 2012.
Some well respected economists are calling for the yield on the 10-year Treasuries to go to the mid 2 percent range, and perhaps down further to the 2.2 percent range.
If so, one will need to meet the demands of today’s underwriting standards. Expect a full documented loan. This means pay stubs and possibly tax returns will be required for income verification. Assets will be verified using bank and stock statements and good credit.
Expect mortgage rates to continue to remain attractive for the near future at least. This is truly a great time to refinance or buy a home.
Bill Starrels is a senior mortgage loan officer who specializes in refinance and purchase money mortgages. He lives in Georgetown and can be reached at 703-625-7355.
Mortgage Rules In 2011
Bill Starrels • July 26, 2011
-extreme. There were too many abuses by the mortgage industry and some customers. There were too few restrictions on loan programs and lending overall. Basically, things were too loose.
Fast forward to 2011. The mortgage industry is at a polar opposite from just a few short years ago. The industry has gone from loose to constrictive. In fact, constrictive may be too light a word to describe how regulations have changed, which completely altered the basic dynamics of getting a mortgage loan in today’s market.
Full documentation loans rule the day. What this means is that everything has to be documented fully. Pay stubs, tax information, bank account information on every account used in the transaction. Almost any extraordinary deposit has to be documented as to where the money came from. This can be asked on very modest deposits, not just large deposits.
If one submits tax returns for a loan, those returns have to be signed, whereas just a couple of years ago, stock transcripts from the IRS would satisfy the underwriters.
Gone are the days of low documentation loans. Long ago, if one had excellent credit and a large amount of equity in their property, a bank would not have to document all the income or assets used for the loan.
These days, no matter how much equity one has on the property being refinanced, everything must still to be documented. Income has to be checked, as does the asset information. If a homeowner is refinancing a loan for $500,000 against a value of $2 million there is equity of $1.5 million. Common sense would dictate that there is enough equity to allow for some relaxing of the documentation rules. But in today’s banking world, this loan too needs to be fully documented.
The chances of a homeowner walking away from a home that has a loan for 25% of its value is very small. In a worst-case scenario if something unexpected happened and the financial institution ended up with the home, the institution would have property worth a lot more than the mortgage.
For condominium mortgages the industry is now starting to ask for proof of walls in insurance to be in place. The logic is that in case of a fire, the industry wants to make sure that the condominium owner will restore the unit to its current condition.
Credit criteria remain strict. On FHA loans, the minimum criteria on a basic loan requires a FICO score of 620. On conventional loans the requirements are higher. Credit scores on conventional loans will effect the overall pricing of the loan.
No one expects the rules in the industry to relax anytime in the near future.
Bill Starrels is a mortgage loan officer who lives in Georgetown. He specializes in purchase and refinance mortgage loans. He can be reached at 703 625 7355 or email email@example.com
Mortgage Interest Rates Respond To World Events
Bad news can be good news for the bond markets and ultimately for mortgage interest rates.
When investors are uncertain about national and world events, money is taken out of the equity markets and goes into safer instruments like United States-backed Treasury Bills. Investors are now driven by events centering on the epic earthquake and resulting events in Japan. Investors as a rule do not like uncertainty. The devastation the earthquake has caused, coupled with the unraveling of the nuclear reactors, is sending uncertainty off the charts.
The week after the disastrous earthquake and tsunami and the resulting tragedy in Japan, the yield on the 10-Year Treasury Bills hit lows not seen since December of 2010. 10-Year Treasury notes reached a recent high water mark at 3.725% on February 8th, 2011. On March 2, 2011 the rate fell to 3.212%. This represents a spread of fifty basis points in a very short period of time.
Another driving force in bonds continues to be oil prices. Oil prices have found their way north or $100 a barrel. The events in Japan have tapered the surge in oil prices. The theory here is that with Japan’s economy being driven off the tracks due to the earthquake, their use of oil is greatly diminished for now. The concern over oil is that oil is inflationary.
What is not being talked about is Japan’s great dependence on nuclear power and how that relates to oil. It is possible that Japan will be more dependent on oil when their economy starts to build again. Granted it will take a lot of time for Japan to get back on its feet, but when they do the Japanese government will have to find a replacement for the Fukushima nuclear power plant that is now permanently offline and is still posing the threat at this time of a meltdown. Who knows what deficiencies will be found at the numerous other nuclear power plants.
In an article published by “Knowledge at Wharton” they talk about the impact of Japan and oil. The “fallout of the earthquake and tsunami in Japan has added to oil market confusion,” it says.
It is also noted that there are upside pressures on oil at the same time. The unrest in the Middle East, most recently in Bahrain, Libya and Egypt, causes speculators to drive up oil prices. Every $10 dollar rise in a barrel of oil results in a 25-cent increase in gas prices according to the folks at Wharton. Wharton professor Jeremy Siegel states, “Based on the amount of oil the US imports, every $10 increase in the price of oil equates to about a quarter of 1% of the country’s gross domestic product (GDP).”
Although rising gas prices do fuel rate increases, they will temper the growth of the economy, which may temper the future rise in interest rates.
The bottom line is that there is a lot of uncertainty in the world and in the financial markets. Expect a lot of volatility in interest rates for the near term.
DC Home Prices Increase, Despite National Trends
Case Shiller Index reported that of the 20 cities it recorded, home prices are off to a dismal start, with 18 cities down in price. Only 1 city actually had a 3.6% increase in prices. Guess which city that was…?
You got it right, the Washington, DC area. So with all the negative press these days about housing being in the dumps and prices poised to drop further, one needs to recognize that these are national numbers, not local.
Why is the District fairing better than the national average? Low unemployment with a rate of 5.6%, high affordability, above average home price growth, falling foreclosure rate, less houses under distressed sale, cheaper to buy then rent, and an increasing population. All these bode well for the future of housing in the Washington region. This is why we are actually seeing multiple offers this spring with low inventory levels. Realtors’ biggest complaint is that there is not enough inventory to sell, which is starting to drive up prices.
So now you ask yourself why you should pull the trigger today. Here are the best reasons why now is a good time to jump off the sidelines and get into the housing market:
1.) You can still find a good price if you look hard. The MRIS (multiple regional listing service) and Delta Associates are estimating that the increasing number of jobs into the area will continue the price gains long term. Buying now makes sense as clear statistics show prices are on the incline.
2.) Mortgages rates are still low, but not for long as the economy shows continued signs of improvement. Today you can get a loan around 4.75%, where just 2½ years ago rates were at 6.25%. Over a 30-year period, that can save you many thousands of dollars.
3.) You will save on income taxes to be able to afford more per month. You can deduct the mortgage interest and real estate taxes off your net taxable income.
4.) You will be able to hedge against inflation in the long term. You are not guaranteed a quick return in 2 years, but history has shown that owning a home over an extended period of time does beat inflation by a couple of points a year over average.
5.) It’s forced savings. As you continue to make your mortgage payment monthly, more dollars go into principal to pay the loan down which builds up equity. On top of those savings you have the appreciation of the property over the long term. Like the stock market, it is risk capital. As the stock market continues to go up and the economy improves the price will start to appreciate again. Just look at history.
As populations continue to grow in our country and here in the DC area, strain is going to be felt in the price of homes if new housing is not being created. New building permits are only growing at 4%, and while this is sufficient to cover population growth, it won’t be enough to cover those moving to the market or the people coming from being renters to buyers. Act now, and don’t pay attention to the negative headlines about housing.