Mortgage News Archives - The Christiansen Group

January 25, 2018 by Neil Christiansen Leave a Comment

2018 US Economic Outlook

He’s back! Each January, Barry Habib, Founder and CEO of MBS Highway and mortgage & real estate market expert returns to unveil his economic outlook for the year.

Barry’s newest economic outlook explains what dynamics are in place for 2018, where the stock and bond markets are headed, the future direction of interest rates and housing, and how the new composition of the Fed will affect the markets.

2018 Economic Outlook Dynamics

Possible stock market pullback – How would this effect housing and rates? Housing will have a bit of a headwind. If people start to see their stocks investments dwindle some they’re less like to make big investments.
The new look of the Fed – Fed officials have expressed a range of views about the frequency of rate hikes in 2018 – with opinions ranging from 2-4 hikes. They are also scheduled to further unwind their balance sheet. How will this impact mortgage rates?
Rates are set to rise in year ahead – How much and what will the impact be?
Housing & Tax Reform – Can housing continues its impressive run and will tax reform be a drag?

Key Areas To Consider This Year

1. Stocks

Stocks appear toppy and a bit vulnerable. We’re entering 2018 with extremely high investor optimism, in fact the US is at a 30-year high in optimism. This is often a dangerous sign.

We’re in the most expensive stock market on a price of a stock to sales on the S&P ratio ever. The last time we saw a run this high was in 2000. While he’s not saying we’ll will experience the same type of downturn we did then, it’s something to be concerned about and we could see a cooling off period.

As we begin the new year, we have seen over a 100-month consecutive expansion without a recession. The current market cycle, started back in early 2009, is the 3rd longest expansionary stretch in history. The current market cycle started back in early 2009 and has been chugging along for over 8 years. (the first was 120 months ending in early 2000’s), so we may begin to see a slowing in this cycle.

Barry’s Prediction: There will be a significant stock market pullback during 2018 after such a big 2017.

2. The Fed: Changing Of The Guard

With a new sheriff in town and all the appointments that need to be made, this will be a very different Fed than we saw in 2017. Jerome Powell will succeed Janet Yellen as the new Fed Chairman when she steps down on February 3rd. Powell, viewed as a centralist, is expected to follow Yellen’s cautious approach to interest rates.

Trump may need to appoint up to 4 Fed Governors in 2018, including replacing Vice Chairman Stanley Fischer and NY Fed President, William Dudley. Also out are two of the monetary doves Neel Kashkari and Charles Evans.

The bigger impact to rates, however, will come from the unwinding of the Fed’s balance sheet. Last October they began to reduce their reinvestment of mortgage bonds by $4 billion/month. (Prior to that they were buying back $25 billion in mortgage bonds, and even more than that in treasuries.) They’ve been very active in bond market to keep yields lows. This month they’re doubling their curtailment to $8 billion, buying back $17 billion in bonds. Each quarter will see another $4 billion reduction – ending the year at a $5 billion buy back.

Without the Fed in the market to keep up that buying could make for an interesting 2018. The purchase of mortgage bonds needs to replaced somewhere, the question is, how much do rates need to move up to entice that? That’s the biggest reasons Barry thinks rates will move up slightly in 2018.

Barry’s Prediction: If we see a stock market pullback we expect 1-2 hikes. Probably with the first in March and the second in September. There may be another one in December, but unless Trump appoints a very hawkish Fed, we probably won’t see it.

3. Rates

The main driver of rates, inflation, should remain tame as the Fed won’t be as active. Rates will move higher, but not by too much.

As we discussed in the last section, the Fed reinvesting less in mortgage bonds less will be the main reason for an increase in rates.

On the opposite side, since both stocks and bonds compete for the same investment dollar, a pullback in the stock market could help rates.

Barry’s Prediction: The 10-year Treasury Note Yield will trade between 2.18% and 2.64% for most of the year. Mortgage rates will move .375% higher on average.

4. Housing

We closed out 2017 with incredible numbers both on new construction and existing and this is a market has an incredible amount of momentum and strength going forward. Some of the drivers are:

Low Inventory
Rents rising at 4% per year
A modest move higher in rates won’t derail housing market
Demand remains strong

Although tax reform did reduce the deductibility of a mortgage from $1 million to $750,000, that will hurt more on the high end. Since the standard deduction has been doubled, there’s a bit less of an inventing to buy to get the deduction, which makes renting more attractive from a tax perspective.

Barry’s Prediction: 4.5% – 5.5% Appreciation (U.S. Average)

January 18, 2018 by Neil Christiansen Leave a Comment

How The Homebuyers Savings Account Helps First Time Buyers

Owning a home is part of so many American dreams. For some though, it inches further and further out of reach as real estate prices rise at a much faster rate than their income grows. The First-Time Homebuyer Savings Account Act (FHSA) was passed in Colorado to help people who dream of buying their first home – and it all starts with a homebuyers savings account.

Today we’ll be laying out some facts to help you decide if it might be helpful for you.

What’s The Idea Behind The FHSA?

It makes a key change to the federal tax code to create 529-style homebuyer savings accounts for those who want to buy their first home. This 529 plan model has been very successful and continues to provide parents a tax-advantaged option to help save for their children’s college education. Now, this same idea can be applied to saving for a first home (this includes single‐family houses, condos, coops, townhouses, or mobile homes). It was signed into Colorado law in 2016; Virginia and Montana have similar laws.

How Does It Work?

An individual can deposit up to $14,000 in the homebuyers savings account each year. Married couples who file jointly may deposit up to double that amount each year (after taxes) into a first-time homebuyers savings account with a maximum lifetime investment of $50,000. They can even put their homebuyers savings account toward someone else’s first home – a child, grandchild, nephew, or even a friend.

This investment can grow up to $150,000 and any earnings on those funds — interest and capital gains — are completely free from Colorado state taxes (federal taxes still apply on the interest earned). There’s no time limit on how long the funds can remain in the account and these limits are adjusted for inflation. Keep in mind this homebuyers savings account can only be used to fund the down payment and any fees and costs (closing costs, inspections, lender fees, etc.) that come with purchasing a first home.

Who Qualifies As A First Time Homebuyer?

A first time homebuyer is someone who hasn’t purchased a home before. If you have owned a home, but did not purchase one – ex: if you inherited a home – you can still qualify. In addition, if you are divorced and previously have owned a home with your spouse, but haven’t been listed on a property title for at least three years, you qualify.

If you’re buying a home with someone who is previously owned a home, you’re still able to use your FHSA funds, as long as you qualify as a first time homebuyer.

How Are Homebuyers Savings Accounts Created?

These types of accounts are very simple to set up. And, bonus: first-time homebuyers can also designate just about any existing account as an FHSA. To create an FHSA, simply include the correct form when filing state taxes to indicate the account’s FHSA status – this will prevent any earnings (for instance, interest or capital gains) from being taxed.

Buying a first home is often not only a sound financial move for the new homeowners themselves, but has a much broader positive financial impact on our economy as a whole. Thanks to the FHSA, owning your first home might just be closer than you think!

Down Payment Strategies For Buying Your First Home

^{DISCLAIMER: This article is intended as an introduction to the First Time Homebuyers Savings Account. This is not an offer to extend credit or a commitment to lend.}

December 14, 2017 by Neil Christiansen Leave a Comment

Should You Pay Off Mortgage Debt Early Or Invest the Cash?

How amazing would it feel to live a life free of mortgage debt? Depending on where you are in life, this might be very doable for you. But should you necessarily pay down your mortgage debt?

When you pay off your mortgage debt early, it will likely be at the expense of other financial goals and investment options, while impacting your tax situation. On the other hand, you’ll save money on the additional interest that would have come along with your regular payments. This savings can be significant and will grow with the prepayment amount.

Another reality, however, is that when you pay off your mortgage debt, those funds are no longer yours to invest. And if your interest rate is already low, you’ll benefit less from paying off your mortgage debt.

Let’s Consider An Example

Say the interest rate on your mortgage is 4% and you’re in the 28% federal income tax bracket. Your after-tax mortgage rate is around 2.9% – maybe even lower if you can also deduct the mortgage interest on your state income tax return.

For those who invest, their portfolios are built around a risk tolerance that carries a much-higher annualized expected investment return than 2.9%. For some people, a guaranteed 2.9% savings is more appealing than a higher expected market return, since it’s subject to greater volatility and risk. But for those with a much higher after-tax mortgage rate, paying off mortgage debt early will likely be a more enticing option.

So, how do you decide which path to take? Today we’re sharing 5 questions to help get you started.

1. What Is Your Tax Strategy?

Your ability to deduct mortgage interest might turn out to be very important. Think about whether you’ll still be able to itemize deductions without mortgage interest.

2. Will You Really Invest The Extra Cash?

It might sound like a great plan to invest the cash that used to go towards paying down your mortgage – but do you have the discipline to do that? If you suspect you’ll struggle with this, you’re not alone! There are great options to keep your plan on track, including direct deposits into your brokerage account or increasing your monthly 401(k) contribution.

3. Do You Have More Urgent Financial Goals?

It’s important to take a look at your entire financial story. If you’ve got student loans, credit card debt or still need to add money to your emergency savings, these things might take priority.

4. What Life Stage Are You In?

Whether it’s a solid decision to pay down your mortgage debt will hinge on your life stage and risk tolerance. If you’re nearing retirement you likely have an asset allocation that’s more conservative. In that case, investing the excess cash in the market might spell unnecessary risk for you. At the same time, being debt-free also becomes more important later in life.

5. How Long Do You Plan To Stay In Your Home?

If you plan to remain in your current home for the long run, it makes more sense to pay down your mortgage debt than if you never anticipate paying it off.

Mortgage Debt Looks A Little Different For Everyone

Still on the fence about which decision is best for you when you’re considering paying down your mortgage debt? For now, a healthy middle ground might be opening a dedicated savings account for any extra cash and reconsidering the decision six months’ time. When you separate these funds, you’ll be less likely to spend it on daily expenses in the meantime.

As you think through your options, remember to stick to realistic expectations. Choose a plan that keeps your original plans at the forefront. And always consider discussing this decision with your financial advisor or tax professional before you settle on a strategy.

^{*Disclaimer: Citywide Home Loans does not provide financial planning services or any other service apart from lending. You should always consult with your legal, tax and financial advisors to determine which strategy is the most suitable for your specific circumstances.}

November 9, 2017 by Neil Christiansen Leave a Comment

Student Debt Delays Home Purchase

The huge majority of millennials carrying student debt currently do not own a home – and they believe student debt is to blame for the delay.

This is according to an April 2017 study on millennial student debt released in September 2017 by the National Association of Realtors and the nonprofit American Student Assistance. In April 2017, ASA distributed a survey to 92,419 student loan borrowers (ages 22 to 35) who are current in repayment. A total of 2,203 student loan borrowers completed the survey.

You may have heard of this study, which has been making headlines. Today we’ll walk through a few key stats this study found, what it means for you as a future homeowner – and why there’s still plenty of hope.

Most Millennials Expect Delay In Buying First Home

Only 20% of the millennial respondents (ages 22 to 35) currently own a home. So why is it that 80% of the millennials in the survey don’t own one? 83% of them point the finger at student loans. The median amount of time they expect to put off becoming a homebuyer is seven years.

Consider these facts about the student loan debt that’s shaping their choices:

The typical amount of student debt of $41,200 exceeds their annual income of $38,800.
79% borrowed money to finance their education at a four-year college.
51% are repaying a balance of over $40,000.

Sales to first-time buyers have been sluggish for several years now, with the percent share of first-time buyers in the past three years holding steady at 33 percent – well below the long-term historical average of 40 percent.

In fact, a quarter of current millennial homeowners said their student debt is keeping them from selling their home to buy a new one, either because upgrading is too expensive or because their loans have had a negative impact on their credit for a mortgage in the future.

Student Debt Also Impacting Other Life Choices

86% of millennial respondents described themselves as having made sacrifices in their career, all because of their student debt. These measures included:

Taking on a second job.
Staying in a job that makes them unhappy.
Taking a job outside their field.

Meanwhile, more than half are delaying continuing their education and starting a family, while 41% would like to get married but are delaying this milestone because of student debt.

Very unsettling is the finding that 61% of respondents at times have not been able to make a contribution to their retirement. 32% were sometimes able to make a contribution, but with a reduced amount.

A pattern where only those without student debt can afford homeownership and saving for retirement could certainly ultimately weaken the economy. However, Jean Eddy, president and CEO at ASA, notes that, “Student debt is a reality for the majority of students attending colleges and universities across our country. We cannot allow educational debt to hold back whole generations from the financial milestones that underpin the American Dream, like home ownership.”

The Good News

This study has certainly made waves and contained some jarring information. But while every situation is different, even if you’re a millennial saddled with student debt, owning a home reasonably soon might not out of reach at all! When talking about the 7-year delay in homeownership, it’s possible millennials are actually overestimating how much they really need to save for a down payment. Most millennials said that the minimum required down payment is 21%, according to a recent survey from national nonprofit NeighborWorks America – a figure that can actually be much lower.

By expanding homebuyer education, student loan debt counseling and spreading the word about down payment assistance initiatives, millennials can clear up confusion and improve access to affordable options. You certainly don’t have to give up on your American Dream!

November 2, 2017 by Neil Christiansen Leave a Comment

Mortgage APR Pitfalls: What You Should Know

When it comes to mortgage loans, there is a lot of emphasis on APR, or Annual Percentage Rate. It has become the standard for comparing different mortgage loans. While the purpose of APR is a noble cause – the approach is highly flawed.

Today we’ll be digging into the real mathematics behind APR and looking at the best way to compare loans.

The Purpose Of APR

APR is the amount of interest on your total loan amount that you’ll pay – averaged annually over the full term of the loan. It reflects the interest rate as well as other costs such as lender fees, broker fees, discount points and some closing costs.

It attempts to allow a consumer to decide between different types of mortgages, with varying rates, points and fees.

For Example: Is it better to pay 4.25% with 0 points, or should you pay 2 points and bring the rate down to 3.75%?

Let’s break it down:

The Amount Financed

The amount financed (Page 5 of your Closing Disclosure) shows the amount of money you’re borrowing from the lender, minus most of the upfront fees the lender is charging you. These “prepaid fees” that reduce the loan amount on the Truth in Lending disclosure are amounts of money the lender will receive when the loan closes.

Let’s take a simple example: Say your loan is $100,000, and you must pay the lender closing fees of $1,100.

The calculation looks like this:
$100,000 (Loan) – $1,100 (Lender Fees) = $98,900 (Amount Financed)

Your Truth in Lending will show a loan amount of $98,900. When you close on your loan, the lender receives the $1,100 in fees, and the net amount you’ll receive, or the amount financed is $98,900.

The amount financed is the number used to calculate the APR.

From Amount Financed To APR

Once the amount financed of $98,900 is established, we use the monthly payment on the loan as a function of the loan amount to calculate the APR.

Example:

$100,000 Mortgage
Interest Rate on a 30-year Fixed: 4.25%
Monthly Payments (P&I): $492

A $492 monthly payment on this $100,000 mortgage corresponds to a 4.25% interest rate on a 30-year fixed loan. To calculate APR, we take the 100,000 mortgage and replace it with the amount financed. The $492 monthly payment on the $98,900 amount financed corresponds to a rate of 4.35% …this is the APR.

Comparing Loans Using APR

We’ll take what we’ve used in our previous examples and call it Loan 1. To compare loans, we made a few changes in loan 2. In the second loan the client pays $2,000 for a ½ percent rate drop (from 4.25% to 3.75%). The result is a $29/month lower P&I payment. The amount financed also decreases to $96,900. The payment of $463 as a function of $96,900 now results in a APR of 4.01%.

When you compare APR, loan 2 looks like the better option. But is it? Let’s take a look!

A True Breakeven

While loan 2 saves you $29/month, it costs $2,000 more upfront. Dividing $2,000 by $29/month shows that it takes almost 6 years to breakeven on the upfront funds.

What if instead of paying the extra money upfront, you reduced your loan amount by the same $2,000? This brings the difference in payment to $19/month vs. $29/month. The resulting breakeven period is now almost 9 years – providing real savings only after this time, even though the APR is lower.

Since APR spreads the fees paid upfront over the life of the loan, the comparison is only accurate if you plan to keep the mortgage for the entire length of the loan – typically 30 years. Since most borrowers do not keep their loan for the full period (they typically refinance or move), loan 1 is the better option for the first 9 years and would likely result in the best choice for the majority of borrowers.

APR Inaccuracies

APR can be misleading, and for the most part, points are the wrong option for borrowers.
For APR to be accurate, it assumes that you will have the loan for its entire duration. Therefore, no prepayments, refinances, or selling of the home for the entire life of the mortgage.
APR also assumes zero inflation – not taking into account the value of money now is worth more than dollars being paid back 20-30 years later.

The Bigger Picture

APR is a flawed way to compare loans and getting the lowest APR doesn’t mean you’re doing the best thing for your overall financial position. You need to look at the big picture. It’s much better to utilize the more accurate compassion of cost vs. savings and take into consideration the value of money spent today for upfront costs to determine a true breakeven target.

^{All scenarios are for illustrative purposes only. Actual loan costs, rates and fees may vary. This is not a offer of credit or a commitment to lend.}