Compare Before Deciding on the Standard Deduction

The TCJA of 2019 dramatically increased the standard deduction so that many homeowners benefit from taking that rather than itemizing their deductions.  Taking the standard deduction may result in a larger deduction even if you have no expenses that qualify for claiming itemized deductions.

Another thing reinforcing taking the standard deduction was low rates at the time and the interest plus property taxes were less than the standard deduction.

In 2022, mortgage rates more than doubled, so, anyone who purchased a home or refinanced at the higher rates might benefit from itemizing rather than taking the standard deduction.  The takeaway in this article is to compare both methods each year to see which way provides the larger deduction.

For 2022, the standard deduction for married couples filing jointly is $25,900, for single filers and married individuals filing separately is $12,950, and for heads of households is $19,400.  There are increased amount for seniors over 65.

Mortgage interest, points paid to purchase a home (paid by seller or buyer), and property taxes are deductible on Schedule A.  Other items allowed as deductions are charitable contributions, medical expenses in excess of 7.5% of taxpayers' adjusted gross income, and casualty and theft losses from a federally declared disaster.

In 2019, IRS reported that 89.5% of people took the standard deduction which is easier to file, doesn't require receipts, and may yield a higher deduction than itemizing but the only way to be sure is to compare both ways.

For more information, download Publication 529 or contact your tax professional.  Download our Homeowners Tax Guide for more information on homeowner taxes.

Negotiate a Buydown to Get into a Home Now

If you are a prospective homebuyer, things have changed in the past year.  Most notably, mortgage rates have more than doubled which has created an affordability gap that has taken approximately 15 million buyers out of the market.

Inventories are growing but it isn't because more people are deciding to sell their homes; it is because it is taking longer to sell properties because less people are qualified.  Current housing inventory is a little more than a quarter of what it was in 2008.

Buyers are wondering when the market will return to normal, as if mortgage rates at three and four percent should be commonplace.  The average mortgage rate between April 1971 and November 2022 is 7.76%.

Predictions for mortgage rates in the third quarter 2023 range from 4.5% for Fannie Mae, 5.0% for Mortgage Bankers Association, and 5.2% for Freddie Mac.

Traditionally, over the past 35 years, there is a 175-200 basis point difference between the 10-year Treasury and the 30-year mortgage rates.  However, recently, the spread has been 300 basis points.  Some experts explain this to indicate that the Fed's tactics for lowering inflation is working and the mortgage market will soon respond which is indicated by lower rates in the past few weeks.

"The gap between the 30-year fixed mortgage rate and the government borrowing rate is much higher today than it has been historically," NAR Chief Economist Lawrence Yun, said. "If we didn't have this large gap, mortgage rates wouldn't be 7%, they would be 5.8%."

There is opportunity for prospective buyers in today's market.  The slowing of housing sales, down 34% from December 2021, have changed the environment buyers were experiencing in 2020 and 2021.  Instead of having to pay a premium over the list price, many sellers are willing to negotiate on price.

Without multiple offers being the normal, buyers can expect to include contingencies for financing, appraisal, inspections, and possibly, the sale of a home currently under contract.

Some buyers who are confident that mortgage rates will come down soon have opted to purchase now with an adjustable-rate mortgage.  This can lower the rate by about one percent for the first period which can be five years.  When mortgage rates returned to acceptable, the borrower could refinance to a fixed-rate mortgage.

Another option to consider would be to do a buydown on the mortgage rate.  Assuming that in the "softer" market, the seller would accept an offer to buydown the interest rate for the first two years.  It would allow the buyer to purchase at today's prices, with much lower payments for the first two years.

Example

$500,000 Purchase Price, 80% loan-to-value @6.13% for 30 years | Cost of buydown - $8,934
	1st year	2nd year	Remainder
Payment Rate	4.13%	5.13%	6.13%
P&I Payments	$1,940	$2,179	$2,432
Monthly Savings	$492	$253

 

This type of mortgage is a standard, conforming, fixed-rate loan where the buyer must qualify at the note rate.  The payment for the first year is 2% less than the note rate and for the second year is 1% less than the note rate.  The difference must be paid in advance at closing and in the case of this example, the seller paid it based on contract negotiations.

During this period of lower payments, if the rate comes down, they could refinance the property.  Let's further assume that the rates come down at the end of the first year.  If the property is refinanced before the pre-paid interest is owed, the lender is required to reimburse the borrower which could be applied toward the cost of refinancing.

When the mortgage rates do return to an acceptable rate, there may be considerable pent-up demand from the mortgage-ready buyers who were priced out of the market.  This could lead to another seller's market where high competition results in prices above list price and sellers not willing to accept contingencies.

Temporary rate buydowns have been available for decades.  Their main purpose is to help a borrower get into a home with lower payments initially.  In some cases, they need it because they depleted their cash reserves on the down payment; in other situations, maybe, they are upwardly mobile and expect to be making more income soon.

The reason lenders across the country are talking about them now is because they provide a reasonable and viable alternative to buying a home at today's prices without having the higher payment initially for the current rates.  It especially makes sense if you believe that rates are coming down soon.

Your real estate agent can give you more information about this and explain how you can negotiate with the seller to pay the fee to get this type of loan.  Call us at (205) 915-7653.

If you're on the sidelines, at least get ready...

If you're on the sidelines to buy a home, there are things you can do to be ready when you do get back in the game.

Improve your credit score to qualify for the best mortgage rate available which are reserved for those with the highest scores.  Get a copy of your current credit reports from all three of the main credit bureaus: Equifax, TransUnion, and Experian.  You can get them at AnnualCreditReport.com without paying for them.

While you won't see a credit score on these reports, you will see a history of your available credit accounts.  According to the Federal Trad Commission, one in five people have at least one error on one of their credit reports which can lower your score or increase the cost or likelihood of receiving new credit.  Identify and correct these mistakes. 

Explain in writing the error in the report and include copies of documents that support your dispute.  Both the credit bureau and the business that supplied the information must correct the information that is in error.  There will not be a fee to correct it.  You can get specific info for the process on each credit reporting companies' website and from the FTC Consumer Advice.

There is a term call "credit utilization" which describes how much of your available credit on each revolving account is currently being used.  If the limit on one card were $10,000 and you had a $5,000 balance, the utilization ratio is 50%.  Amounts above 30% can negatively impact your credit score even if you do pay the balance each month.

Any delinquent items that may appear on your credit report need to be cleared up.  Regardless of whether there is a legitimate reason, it needs to be explained to the credit bureau.  Beginning in 2023, medical collections less than $500 will no longer be reported on consumer credit reports.

Continue to save for a down payment because mortgages less than 80% of loan-to-value require mortgage insurance which increases the monthly payment.  The exception to the rule is for VA loans which do not require it.  The cost of mortgage insurance could add 0.5% to 2% or more to the payment.

Lower your debt-to-income ratio by paying off installment loans for cars, boats, and other things.

While there are legitimate credit repair services available, you may be able to get excellent advice from a trusted mortgage professional.  You'll eventually want to be pre-approved before you start looking at homes.  Your real estate agent can make a recommendation to connect you with someone who will get you ready to get back into the game.

Negotiating Your Position

The seller wants the most for their home and the buyer wants to pay the least possible.  From the very beginning of the homebuying process, there are adversarial positions between the principals.  If you happen to be in a multi-offer situation, it just complicates things further.

Then, there are the emotions that tend to cloud the decision making on both sides of the transaction.  Sellers have lived in the home for years, possibly, with cherished family experiences and maybe, having put considerable effort and money into capital improvements.

On the buyer side, they may have lost out on several homes due to competing offers and now, this year, interest rates have doubled, and the discretionary funds required to pay for a home could be causing cuts in their budget in other areas.

A year ago, buyers were waiving contingencies for financing, appraisals, inspections, and other things just to be competitive.  Today, to make the home more affordable with the higher mortgage rates, buyers need the seller to make financial concessions but who is going to make their case to the seller for them?

The role of a third-party negotiator played by the real estate professionals has always been valuable to the success of the transaction but now, it may even be essential.  Sellers enjoyed an extraordinary market in their favor for the past two years with incredible appreciation and so many buyers chasing so few homes, the sellers were able to write their own ticket.

Inflation and mortgage rates have put the brakes on the market, eliminating over 15 million mortgage-ready buyers.  The buyers who are still in the market need to be cautious, so they don't overextend themselves and overpay for a home.

The agents can assist both the buyers and sellers in seeing things in an objective way that reflects the current market and not the way it was a year ago.  All parties must be reasonable and not expect too much.  They need to consider facts and not feelings.

Negotiating the sale or purchase of a home is a competition; for one person to get something, someone must give something up.  If a person doesn't feel comfortable with this, it is important to work with an agent who can bring their skills to the table on your behalf.  As your advocate, they can champion your position and put transactions together that would not have been possible if it were left to the principals alone.

Negotiation skills are acquired through training and experience.  When interviewing an agent, ask them what role negotiation plays in their marketing plan if you're a seller and purchase plan, if you are a buyer.  An agent who cannot defend their position in the transaction may not be the right person to defend yours.

Turn Back Time

As the expression goes, "if I could turn back time", maybe you'd would do some things differently.  If you're wanting to buy a home, the regret may come from not getting a mortgage when rates were half of what they are today.  There may not be a way to literally "turn back time" but you may still be able to get a mortgage with last years' rates.

Let's say a home was sold in the fall of 2021 for $350,000 with a 3% FHA loan.  Today, winter of 2023, the home is on the market for sale at $400,000.  There are buyers who have $40,000 for a down payment, who like the home, and want to purchase it.

At today's mortgage rate of 6.42%, the $360,000, 30-year mortgage payment would be $2,2565.54 for the principal and interest.  They have been looking for a year and in the past 12 months, the mortgage rates have doubled which will stretch their finances along with all the other inflationary pressures.

Their incredibly savvy agent has learned that the underlying mortgage is an FHA mortgage at 3.00% with a little less than 29 years remaining.  This loan could be assumed by an owner occupant at the current rate which would save the buyer a considerable amount of interest.

The problem is that the buyers do not have enough cash to buy the equity.  The unpaid balance is $328,902 which makes the equity about $71,000 which is more than the $40,000 they have available.

The agent believes that with the buyer using the $40,000, they should be able to get a second mortgage for the difference of $31,000.  While it may not be possible to get a 30-year term on the second, it may be possible to get a 30-year amortization on the payment and have the second loan due in ten years.

Sources for the second loan could be the borrower's local bank, a credit union, a relative or other investor not happy with what they're earning on cash in the current market.

This could save the buyer over $600 a month.  In addition to a lower payment, assumptions on FHA loans have lower closing costs, they're easier to qualify for, and the lower mortgage rates allow them to amortize faster than a higher rate mortgage.

 

Buyer Scenario #1 ... New Mortgage
Purchase Price	$400,000
10% Down Payment	$40,000
Mortgage at 6.42% for 30 years	$360,000
Principal & Interest Payment	$2,256.54
Future Value at 3% Appreciation in 7 years	$493,342
Future Unpaid Balance	$325,062
Future Equity	$168,280
Buyer Scenario #2 ... Assumption
Purchase Price	$400,000
10% Down Payment	$40,000
Assume Existing Mortgage at 3% for 28.8 Remaining Years	$328,871
Assume Principal & Interest Payment	$1,386.66
New Second Mortgage at 6.5% for 30 years	$31,098
Payment on Second Mortgage	$247.32
Total Monthly Payments	$1,633.94
Monthly Savings	$622.55
Future Value at 3% Appreciation in 7 years	$493,342
Unpaid Balance on 1st Mortgage in 7 years	$266,313
Unpaid Balance on 2nd Mortgage in 7 years	$35,379
Future Equity in 7 years	$191,649
Increased Equity Over New Mortgage	$23,369

 

In the early 1980s, both Fannie Mae and Freddie Mac added "due on sale" and escalation of interest rate clauses to the standard verbiage on notes and mortgages.  From a practical standpoint, this ended assumptions of most conventional mortgages. 

FHA and VA continued to be assumable by anyone, regardless of credit, until 12/1/86 and 3/1/88 respectively.  At that time, an owner-occupant could assume the existing interest rate but had to qualify to do so.  Mortgage rates went down over the next three decades with only some temporary increases until January 2022 when they began to increase dramatically.

If a buyer had to qualify to assume a mortgage, especially if it was higher than the current rates, there was no compelling reason to put more money down for an existing mortgage.  Now, in 2023, this environment has changed.

Many buyers who purchased using an FHA or VA mortgage in the past two to three years, benefitted from some of the lowest rates in over 50 years.   The equities in these properties are still within reason to either assume cash to equity or consider a second mortgage for part of the equity.

If you'd like to learn more about how to assume FHA, VA, or USDA mortgages at lower rates than currently available on new mortgages, contact your real estate professional.  Unfortunately, some agents are not aware of how assumptions work.  Give us a call and we can walk you through the process and even have a spreadsheet that will analyze the comparison for you.

Buy Now, Refinance Later

The dilemma facing would-be buyers today is to wait until things settle down or move ahead in this unsettling economic environment.  More specifically, the question should be, what are you waiting to settle down: mortgage rates, or prices or both?

Mortgage rates haven't been this high since 2002, so it could be considered plausible that the high rates are temporary.  That leads to the question of how long before they do start coming down.  If we look back further, the average 30-year fixed-rate mortgage, dating back to April 1971 is 7.81%, so the current rate is lower than the 50-year average.

The other variable is waiting for prices to come down.  That one is probably not as likely to happen.  We have seen some softening of prices for homes on the market which is due to a decline in sales based on affordability and the resulting increase in inventory. 

Sales reached a seasonally adjusted annual rate of 4.09 million in November which is down 35.4% from one year ago, conversely, inventory has increased to 3.3 months from 2.1 months one year ago according to the NAR Housing Snapshot of Existing Home Sales.

While listing prices may be coming down, sales prices are still rising from the same month a year ago.  The National Association of REALTORS� reported the median sales price for November 2022 is up 3.5% from November 2021.

Homes are expected to continue to appreciate and not come down in value albeit at a much lower rate than was seen in 2021, and even currently in 2022.  Historically, homes have appreciated at 4% annually on a national basis. 

Nationally, the NAR reports 42% of homes are selling at or above list price while 58% of homes are selling for less than list price.

Lawrence Yun, Chief Economist for the National Association of REALTORS� at their recent annual conference, forecast home price appreciation for 2022 at +10%, for 2023 at +1% and 2024 at +5%. 

Some experts are calling for a decrease in prices.  Ivy Zelman, of Zelman & Associates, expects national home prices to fall 4% in 2023 and 5% in 2024.  Goldman Sachs is expecting a 5-10% decrease in home prices from its peak. Fannie Mae is expecting a 1.5% drop in home prices for 2023.  Freddie Mac predicts a 0.2% decrease in values.

Some consumers are anticipating another wave of foreclosures like the Housing Crisis in the Great Recession of 2008.  While the number has increased, it is not expected to reach anywhere near those previous levels.

Homeowners facing difficulties with the labor market and affordability have a significant advantage over those during the housing crisis over a decade ago.  Homeowners currently have record amounts of equity which give them options to borrow against the equity or to sell the home for more than is owed.

Returning to the dilemma facing many would-be buyers, "Wait until things settle down or forge ahead now?"  Being able to afford a mortgage at today's rates certainly factors into the decision.  If inflation is brought under control and rates do return to "normal", or at least the new normal, a buyer would be able to refinance the home at the then, current rates.

Home price appreciation has been close or beaten inflation in each of the past five decades.

Decade	Home Prices	Consumer Prices
70's	9.9%	7.2%
80's	5.5%	5.6%
90's	4.1%	3.0%
00's	2.3%	2.6%
10's	4.9%	1.8%
20 + 21	12%	3%
Source ... NAR & Bureau of Labor Statistics

 

First time homebuyers represent 26% of sales in 2022 down from 50%, its high in 2009.  This is the lowest it has been since NAR started the Profile of Home Buyers and Sellers in 1981.  Desire to own a home is the prevalent reason 62% of first-time buyers cited.

Holding onto cash during high inflationary times is not good because the purchasing power of the cash dwindles because the same dollar is able to buy less.  Moving money into hard assets, like real estate, allows the person to benefit from the inflation on a large asset.  The leverage from using borrowed funds to finance the purchase creates leverage that additionally works in favor of the buyer.

Download our updated Buyers Guide and connect with your agent to discuss your options.

Does high inflation discourage your from buying a home?

Inflation devalues the purchasing power of money and the interest earned on savings is almost always less than inflation.  Tangible assets like your home consistently become more valuable over time.  In inflationary periods, a home is a good investment and a hedge against inflation.

Borrowing money at fixed rates during times of inflation can be very advantageous...like buying a home.  The rate stays the same over the term of the mortgage and so does the payment instead of going up at the rate of inflation.

In September 2022, rents rose by 7.2% according to NAR Chief Economist, Lawrence Yun and "rents are accelerating to higher figures with each passing month."  The annualized rate for this year is 10.6%.  Buying a home allows you to avoid rent increases while enjoying property appreciation.

The housing shortage that is fueling the price appreciation, as well as increases in rent, is something that has existed for over ten years, yet American home building has not kept pace with population growth.

When you are repaying the mortgage, you are using dollars that are worth less and less due to inflation.  Home Price Appreciation has been close or beaten inflation in each of the past five decades.

Decade	Home Prices Average Annual Increase	Consumer Prices Average Annual Increase
70's	9.9%	7.2%
80's	5.5%	5.6%
90's	4.1%	3.0%
00's	2.3%	2.6%
10's	4.9%	1.8%
20 + 21	12%	3%
22	13.4%*	8.2%

*Revised predictions for 2022 home price appreciation are: Fannie Mae estimating 16%; Freddie Mac 12.8%; NAR 11.5%.  Average of three projections is 13.4%

 

The funds for the down payment and closing costs that are sitting idle in a bank, while an otherwise qualified buyer waits to see what happens in the market, are having their value eroded by inflation.  At the current rate of inflation, $48,000 would be worth $39,073 in three years.  In seven years, it would be worth $29,697.

A 90% mortgage at 6.3% for 30-years on a $400,000 home that appreciates at 4% a year will have an estimated equity of $202,000 in seven years due to appreciation and amortization.  That is a 22.8% annual rate of return on the down payment plus $8,000 closing costs.  That is a significant hedge against a current inflation of 7.1%.

The borrowed funds in the mortgage produce leverage for the homeowner to enjoy the benefits as the value of the home goes up while the unpaid balance goes down with each payment made due to amortization.

Every day, a renter, who is otherwise qualified to purchase a home, is faced with a decision to continue renting or buy a home.  Renters will ultimately be facing an increase in their rent, feeling an erosion of the purchasing power of their funds, and experiencing an opportunity cost by not benefitting from the appreciation and amortization benefits of buying a home.

Let's connect and talk about what opportunities are available now and options that could benefit you, even considering the volatile economic atmosphere we're all facing.