Why Are Rates So Low?

Volume 14 Issue 3 March 2020

I t is time for us to ponder an inter-

esting question. At

the beginning of last

year, rates were

headed higher and we were

not supposed to see low

rates again for quite some

time. Of course, the market

analysts were wrong, and

rates fell as 2019 pro-

gressed. We kept hearing of the

threat of recession while trade wars

were being fought. It made sense that

rates would go down if the economy

was slowing.

Yes, the economy did slow down in the

second half of 2019. However, we

came no-where near a recession and the

threat of trade wars start-

ed waning. Sure, there

were plenty of headlines

to worry about, including

the impeachment trial. But

looking at the numbers,

the end result of this trial

was never in doubt. We

had a good strong first

jobs report of the year. So

why have rates not moved higher?

Some will blame the coronavirus. Yes,

the stock market fell back as rates

moved even lower as news of the virus

In This Issue P2 Number of Refi Eligible Soars || P2 Tax Deductions For Homeowners

P3 Why Are Rates So Low? || P4 New Versions of FICO on the Way

Selected Interest Rates

February 20, 2020

30 Year Mortgages——–3.49%

2019 High (Jan 3 %

2019 Low (Sept 5) ——–—3.49%

15 Year Mortgages—— 2.99%

5/1 Hybrid ARMs——–—–3.25%

10 Year Treasuries—–—–1.52%

Sources—Fed Reserve, Freddie Mac

Note: Average rates do not include fees and points. Information is provided for indicating trends only and should not be used for comparison purposes.

Continued on Page 3

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Did You Know…

In a survey of 1,000 adults, 83% of respondents said that they required a home inspection. The average cost for an inspection was $377, and 80% of the respondents said the inspection was paid by the buyer while 19% said it was paid for by the seller. As for inspectors, 86% of the respondents said their inspector found something that needed to be fixed, mostly involving the roof (20%), electrical issues (18.7%) and windows (18.4%). Nearly 90% of respondents said they saved an average of $14,000 on the initial list price thanks to their home inspector. Source: Porch

Tax Deductions...

Page Two

“…get with your tax advisor for clarification…”

Number of Refi Eligible Soars

Y

ou have heard it before. Owning a home is a great tax deduction. It is one thing to

make a general statement. It is another to understand the specifics of how owning a home may lower your tax liability. Below is a list of important points that every homeown-er should know. Note that

this is not a complete list of allowable deductions.

Itemizing deductions. In order to de-duct your mortgage interest, you must itemize deductions rather than take the standard deduction. As a general example, if your allowable standard deduction is $12,000 and you only have $6,000 in itemized deductions, you will be better off taking the stand-

ard deduction. However, if the home gives you an “extra” $10,000 in item-

ized deductions, you are better off itemizing. Note that the “excess” $6,000 ($12,000 minus $6,000) will not garner any benefit because you are now itemizing.

The housing payment. The housing payment is generally comprised of four segments: Principal, interest, taxes and

insurance (PITI). Generally, you can deduct two of these—mortgage interest

and taxes. The good news is in most cases these two items comprise the greatest majority of the total payment.

For example, here are some fictitious numbers given to illustrate this point:

300 Principal 1,000 Interest 400 Taxes

50 Insurance

$1,750 Total Payment (PITI)

Again, using fictitious numbers, if the above homeowner was in a 25% tax bracket, the home payment would actu-ally be reduced by approximately $350

per month after taxes. There are a few exceptions or requirements with regard to this rule—

∗ The deduction is only allowable for principal residences and

second homes. Homes which are rented out (investor properties)

have additional tax benefits.

∗ You cannot deduct interest on any loan amount above $750,000.

∗ You can only deduct interest on a mortgage which is taken out

to purchase, build or improve a property.

∗

I n February, a three-year

low in the average U.S.

rate for a 30-year fixed

home loan pushed the num-

ber of “refi eligible” borrowers

to 11.3 million, the second-

highest on record, according

to Black Knight.

The average savings per borrow-

er would be $268 a month, Black

Knight said. That means the

aggregate savings, if all eligible

borrowers got new home loans,

would be $3.03 billion a month.

Since Americans love new

gadgets, much of that would be

put into the economy to boost the

consumer spending that accounts

for about 70% of GDP. If you

don’t consider credit scores and

equity, there are 22 million

homeowners who have loans

more than 0.75% higher than

current rates, what the industry

calls being “in the money,”

Black Knight said. That, too, is

the second-highest on record.

The record for both categories

was set in September, the last

time rates fell to a three-year

low. But, many of the borrowers

who were refi-eligible then have

already gotten new loans with

cheaper financing...

Source: HousingWire

Page Three

...For Homeowners Why Are Rates So Low?

Continued from Page 1

spread. And news of the virus

spread faster than the virus itself.

But as the initial shock settled

down, the stock market recovered.

Here is the dichotomy. Stocks re-

covered but rates still have not

risen much. Now, we know the

threat of the virus is not over. And

perhaps this threat will bring the

slowdown the markets were antici-

pating.

Or perhaps we will have moderate

growth with historically low rates.

We would call that the best of both

worlds. Our advice? Enjoy the ride

while you can and let's not try to

explain what is happening. Some-

times the markets just have a mind

of their own...

“…We would call that the best of both

worlds...”

∗ You may be able to deduct a mort-gage insurance payment under certain conditions depend-ing upon the year that you paid them.

Points. A point is a cost charged by a mortgage company for originating a mortgage and/or buying the rate down on that mortgage. Generally, points can be deducted in the year that they are paid when they are used to purchase a primary residence. If the purpose of the mortgage loan is to refinance an existing loan, then the points may still be able to be deduct-ed, but the deduction must be spread out over the life of the loan, unless the refinance was to improve the present home. There are additional restric-

tions regarding the deducting of points which are not delineated herein.

Investment properties. Those who own properties for the purpose of gen-erating income can deduct the cost of expenses of carrying the property against the income of that property. Allowable expenses would include interest, insurance, taxes, maintenance,

depreciation and more. Again, using a fictitious example…

$1,000 Rental Income (monthly)

-800 Interest, taxes and insurance

-50 Maintenance

-100 Depreciation

$50 monthly “net” income or $600 for the year

Sale of the home. Another major tax benefit is achieved when someone sells their home. The profits of the sale of a principal residence are ex-cluded from income up to a maximum of $500,000 for joint filers, including married couples, and $250,000 for individuals. You must have owned the home at least two years and used it as your primary residence at least two out of the past five years.

The tax benefits of owning a home are “great” as advertised. You are advised to get with your tax advisor for greater clarification with regard to these general rules. Note that changes to the tax law will affect some of these calculations, including increases in the allowable standard deductions, the lowering of personal tax rates and the maximum deductions for state/local property and income taxes paid...

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New Versions of FICO On the Way

Address Correction Requested

In This Issue:

Why Are Rates So Low?

N

ew versions of the FICO score are coming, but that doesn’t neces-

sarily mean you’ll have a harder time getting a loan. Fair Isaac

Corp., which creates the widely-used FICO scores, will roll out

two new credit scores this summer. The changes FICO has made

to its credit-scoring model could mean a bigger gap between consumers with

good credit and those with poor credit.

People who already have high FICO scores will likely get an even better credit

score under the new system, and people who struggle to pay lenders on time

will see more significant declines in their scores than under previous versions

of FICO, The Wall Street Journal reported. But even if consumers get a lower

numerical score with the FICO Score 10, that may not prevent them from get-

ting an affordable loan.

That’s because lenders use a wide variety of credit-score models to make deci-

sions on whether to provide a loan to a prospective borrower. For example,

residential lenders using the Fair Isaac score follow a “classic FICO” model

required by Fannie Mae and Freddie Mac. That can’t change without approval

from the Federal Housing Finance Agency, which can take a longer period of

time...

Source: MarketWatch