finances

Winter 2015 Guide to Mortgage Rates

Mortgage rates are determined by the supply and demand for mortgage bonds in the bond market.

Why Mortgage Bonds?

When you get a mortgage in the US, your mortgage company is getting the money from Fannie Mae, Freddie Mac or other “securitizers”. These “securitizers” get their money by issuing bonds to bond market investors. These bonds are called “mortgage bonds” or “mortgage backed securities”. Therefore, the mortgage rate you pay is really determined by the supply and demand for mortgage bonds in the bond market.

The Role of the Federal Reserve

As you can see from the chart, the Fed owned zero ($0) mortgage bonds prior to 2008. Once the financial crisis happened, the Fed decided to start buying mortgage bonds in order to drive interest rates down and stimulate the economy. This is called “quantitative easing” or “QE”, and we’ve had several rounds of QE so far.

Currently, the Fed owns a whopping $1.74 TRILLION in mortgage bonds!

The Fed has been the biggest buyer of mortgage bonds in recent years. This had the impact of holding interest rates down to artificially low levels. In fact, mortgage rates were in the 6.5% – 7% range back in 2006 – 2007 before the Fed started buying mortgage bonds. That’s over 2% higher than where mortgage rates are today. Interest rates could be impacted if the Fed issues statements about slowing down or stopping their purchase of mortgage bonds.

Here are Three Things that May Impact Mortgage Rates in the Coming Months

Jobs Report: bond investors and the Fed watch the jobs report and unemployment numbers very closely to determine if the economy is improving and whether they should buy, sell or hold mortgage bonds.
Inflation Report: bond investors and the Fed watch the inflation reports (CPI and PCE) to determine whether they should buy, sell or hold mortgage bonds.
Gross Domestic Product (GDP) Report: bond investors and the Fed follow the GDP numbers to determine if the economy is growing and whether they should buy, sell or hold mortgage bonds. (GDP measures the size of the economy and whether it’s growing, shrinking or stagnating.)

Conclusion: we anticipate continued volatility in mortgage rates over the next several months as bond investors and the Fed decipher the economic reports that we’ve outlined above. Please contact me for more info on which economic reports may impact mortgage rates this week.

Scott Shenton
NMLS Number: 1039731
Apex Home Loans
Corporate NMLS Number: 2884
sshenton@apexhomeloans.com

https://www.apexhomeloans.com/scottshenton

(240) 268-3156
3204 Tower Oaks Blvd, Suite 400
Rockville, Maryland 20852

NMLS #2884 (www.nmlsconsumeraccess.org): Licensed as a Mortgage Lender and Broker by the Virginia State Corporation Commission, License #MC1278; Licensed in the District of Columbia as a Mortgage Lender and Broker by the DC DISB License # MLB2884; Licensed in Maryland as a Mortgage Lender and Broker by the DLLR, License #06-4989; Licensed in Delaware as a Mortgage Lender and Broker by the Office of the State Bank Commissioner, License # 011603.

Five Things You Should Know About Good Faith Estimates (GFEs)

Beware! Not all GFEs are created equal. Here are five things you should know about page 2 of the GFE, where all the closing costs are itemized.

#1 – Block A is Very Important

This section outlines all the fees charged by your bank, credit union, mortgage lender, or mortgage broker. These fees are generally negotiable. For example, you can choose to pay less fees in exchange for a higher interest rate on your mortgage. Alternatively, you can choose to pay more fees in exchange for a lower rate on your mortgage. This is probably the most important part of the closing cost itemization because you have control over how much or how little to pay based on the lender and loan program that you choose.

#2 – Block B Items 3-6 Are Third Party Closing Costs

This section outlines all the fees charged by third parties such as appraisal and title companies. These charges may vary slightly from one lender to the next. However, they are generally very similar across the board.

For example, in many states, title insurance rates are set by the government and are calculated based on your loan amount.

#3 – Block B Items 7-8 Are Government Charges

Neither you or the mortgage company have any control over how much the government is charging for transfer taxes or recording fees. These charges should be the same from one GFE to the next. If you find a GFE that has lower fees than the rest, it’s likely that the lender or broker who gave you that GFE is trying a “bait and switch” tactic by promising artificially low government charges when they know the actual government charges will likely be higher than what they are quoting you.

#4 – Block B Items 9-11 Are Prepaid Items

These are NOT closing costs. The amounts in items 9-11 should be the same from one GFE to the next. If you find a GFE that has lower amounts than the rest, it’s likely that the lender or broker who gave you that GFE is playing games with you by promising artificially low amounts when they know the actual amounts will likely be higher at closing. For example, item 9 is the initial deposit you are making into your escrow account for taxes and insurance. The higher your initial deposit in your escrow account, the better off you are because this means that your escrow account is likely to be fully funded and your monthly payment is not likely to go up in the future. However, if the mortgage lender underfunds your escrow account initially, your monthly payment is likely to go up in the future to cover the shortfall. We’ve even heard reports of lenders and mortgage companies who underestimate what you need in your escrow account on the GFE, and then increase the amount at closing.

Other companies underestimate the amount you need in item 10. For example, if your closing takes place on the 1st of the month, you’ll need to pay 30 days of interest at the closing. If your closing takes place on the 25th of the month, you’ll only need to pay 5 days of interest at the closing. Lenders who play games put 5 days of interest on the GFE. On the other hand, lenders who look out for you help you to budget more conservatively by putting 25 or even 30 days of interest on the GFE. Again, item 10 is NOT a closing cost. It’s simply pre-paid interest on your mortgage that will vary based on the day of month that you close. Remember, mortgage interest is calculated in arrears (backwards). This means that if you close on the 5th of the month and pay 25 days of pre-paid interest at the closing, you’ll skip next month’s mortgage payment. Your first mortgage payment will be due approx. 55 days after the closing.

#5 – Points and Closing Costs Paid by the Seller Still Have to Be Listed on the GFE

In some cases, you may negotiate for the seller to pay some or all of your points and closing costs. Unfortunately, the government did not put any place on the GFE where we can show you what costs are being paid by you vs. costs that are being paid by the seller.

As a Certified Mortgage Planning Specialist (CMPS®) I’d be happy to review your situation and help you compare your options. Contact me for more information!

Scott Shenton
NMLS Number: 1039731
Apex Home Loans
Corporate NMLS Number: 2884
sshenton@apexhomeloans.com
https://www.apexhomeloans.com/scottshenton
(240) 268-3156
3204 Tower Oaks Blvd, Suite 400
Rockville, Maryland 20852

The 90-Day Window for Cash Buyers: How it Works & Why it Matters

Congratulations on paying cash for your home! I just wanted to make you aware that the IRS gives you a 90 day window to put a mortgage on your property and gain the tax benefits associated with the coveted “acquisition indebtedness” status.

What is “Acquisition Indebtedness” and Why Does it Matter to Me?

Any mortgage that is used to buy, build, or improve a primary or vacation home qualifies for “acquisition indebtedness” status. Any mortgage that is used for any other purpose is demoted to the “home equity indebtedness” status.

If you don’t put a mortgage on your primary or vacation property within 90 days of the purchase closing date, any mortgage you put on the property in the future that is not used specifically for home improvements will be demoted to “home equity indebtedness” status. This means that:

You will NOT be able to deduct ANY of the interest at all if you are subject to the Alternative Minimum Tax (AMT)
You will only be able to deduct the interest on up to $100,000 of the mortgage balance if you are not subject to the AMT

On the other hand, if you do put a mortgage on your primary or vacation property within 90 days and qualify for the special “acquisition indebtedness” status:

You can use the funds for any purpose you want (including investment, starting a college fund for the kids or grandkids, retirement needs, etc.)
You can deduct the interest on up to $1,000,000 of mortgage balance regardless of whether you are subject to AMT

Is There a Deadline to Qualify for the Tax Benefit?

Yes! You must put a mortgage on your primary or vacation property within 90 days of the purchase closing date in order to qualify for the special “acquisition indebtedness” status.

What if I Wait Until After 90 Days?

You will lose the special tax benefits associated with the “acquisition indebtedness” status. Any mortgage you put on your primary or vacation property in the future that is not used specifically for home improvements will be classified as “home equity indebtedness”.

Okay, So I Lose the Tax Benefit… But Why Would I Want a Mortgage On My Property in the First Place?

With interest rates being so low right now, you could use the funds for any number of reasons including:

Investment – can you and your financial advisor find a safe investment that yields more than the 2% or 3% after-tax cost of your mortgage?
College fund for your children or grandchildren – would you rather leave them a bunch of equity in a home or a legacy that makes an impact in their life?
Elder care needs – do you have enough set aside to care for yourself or your loved ones as you age?
Retirement needs – do you have enough set aside to provide income during retirement?
Vacation home or other property – how are you taking advantage of the clearance sale going on in the housing market right now?

Remember, if you decide to wait and use a mortgage to do any of these things in the future, you won’t be able to deduct the mortgage interest. It may be worthwhile to put a mortgage on the property now, and then put the funds aside until you know what you want to do with them. After you make a decision, you could then pay off or pay down the mortgage with any leftover funds that you don’t use.

Does the “90 Day Rule” Also Apply to Investment Properties?

No. Investment properties have different rules, deadlines and guidelines that must be followed.

What’s the Next Step?

I would recommend that we have a brief 20-30 minute conversation to evaluate your options and whether a mortgage might make sense for you right now. You could then take my recommendations to your CPA and get his or her opinion before making a decision. If you don’t have a CPA, I’d be happy to make an introduction for you. Contact me using the info below so we can get started!

PLEASE NOTE: THIS LETTER AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936.

WHAT YOU NEED TO KNOW ABOUT FORGIVEN MORTGAGE DEBT IN 2014

The tax break for forgiven mortgage debt expired January 1, 2014. This means that you will be required to pay income taxes on any debt that’s forgiven you this year. For example, if the lender forgives you $50,000 in debt, and your income tax bracket is 25%, you would owe the IRS $12,500!

The “Insolvency” Exception

Here’s an interesting twist: there’s no tax on the forgiveness of debt if you are “insolvent” at the time of debt cancellation. Insolvent simply means that your total debts are greater than your total assets. In our example, assume your total assets are $20,000 and your total liabilities are $70,000. This means that your net worth would be negative $50,000. This would make you “insolvent” according to the IRS, and you wouldn’t have to pay any taxes at all on the $50,000 in forgiven mortgage debt! Keep in mind that when you calculate your assets, you need to include everything you own, including exempt assets beyond the reach of creditors under the law, such as interest in a pension plan and the value of your retirement account.

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