Where Is The Bond Market Taking Mortgage Rates?

If you are still wrestling with "when is the best time to purchase or refinance", here is a great article to let you know what direction the bond market and the resulting direction it is taking rates.

I don't want anyone to miss an opportunity by either waiting, or not understanding what is at stake. Let's talk further on this - call or email me and let's discuss what this might mean for you.

Read on...

Inside Story: False Illusions and What You Need to Know
Last Updated February 4, 2009

The Fed's been at it again, offering words that sound encouraging at first blush, confirming that their buying program of Mortgage Backed Securities is in full swing and will continue as needed.

Of course, the media will pick this up and offer their own interpretation, saying "Good news, the Fed's words on continuing their purchasing program mean that rates will continue to drop lower, and remain low into the summer..." But is this really what that means? Not so.

Here's the truth.

Yes, the Fed has been buying Mortgage Bonds, but if you look at what they are purchasing, they are buying a lot of FNMA 30-yr 5.5% and 5.0% Bonds...which won't have much of an impact on present interest rates. Why? First, see the Fed's purchases for yourself by hitting this link: Direct Link to View Fed Mortgage Bond Buying - http://www.newyorkfed.org/markets/mbs/index.html.

So why is the Fed buying these Bonds?

Well if you think about it, it's very smart of the Fed...and maybe even a little sneaky...because 5.5% Bonds actually represent outstanding mortgages with rates of 6 - 6.50%, which are precisely the loans being refinanced at today's great interest rates.

Stay with me here...

With rates at present low levels, many of the mortgages in these FNMA 5.5% pools being bought up by the Fed will be refinanced and paid, thus giving the Fed a quick recoup on some of their investment. And this is likely a big reason why the Fed said they could continue this purchasing program beyond June, if necessary.

Bottom line:

The Fed buying these higher rate coupons will not necessarily help rates to move lower, as their actions do not impact the loans being originated at today's low rates.

Here's the most important part.

Sometimes I talk to clients who are in a situation where it makes sense to refinance right now, and save $250 per month for example. But when they hear the media throwing around teases of lower rates ahead, they decide to hold off on making the decision to save the $250 per month right now, in the hopes of gaining another $30 per month in additional savings with a lower rate than where we stand presently. Now clearly, rates could turn higher, and this window of opportunity could pass them by entirely.

The clincher is this:

Even if those clients ultimately are correct in timing the market, and eventually grab that lower rate and save another $30 per month - think of what they have lost by waiting.

While they delayed, they lost the savings they could have gained by taking action sooner - or in the example used, $250 - for every single month they waited.

So even if they got lucky and obtained the rate they were looking for, it could take years to make up what they lost by waiting.

I don't want anyone to miss an opportunity by either waiting, or not understanding what is at stake. Let's talk further on this - call or email me and let's discuss what this might mean for you.

$7500 Tax Credit for First-Time Homebuyer's!

Taking the First-Time Homebuyer Credit
Updated: 1/24/2009

Homebuyers could be eligible for a tax break, essentially an interest-free loan worth as much as $7,500, under The Housing Assistance Tax Act of 2008.
Known as the first-time homebuyer credit, the tax break is available if you purchase a home on or after April 9, 2008 and before July 1, 2009, and meet certain income and other requirements.
The credit is equal to 10 percent of the home purchase price, up to a limit of $7,500.
Unlike other tax credits, this one must be paid back to the government, over a 15-year period.

Who is considered a "first-time" homebuyer?
Any taxpayer who has never owned a home as a principal residence.
However, you could qualify if you’ve owned a home before, but not as your principal residence during the three years prior to the purchase.

Married couples cannot qualify for the credit unless both spouses meet the three-year rule.
What qualifies as a principal residence?
Your principal residence is where you live for most of the year. That can be a house, a condo, co-op, house trailer or houseboat, within the United States. Vacation and rental homes are not eligible.

What are the income limitations?
For single taxpayers, the credit decreases as modified adjusted gross income rises above $75,000, and it disappears altogether above $95,000. For example, if your income is $85,000, you could receive a credit worth no more than $3,750.
Modified adjusted gross income is your adjusted gross income, or AGI (your gross income minus certain deductions such as IRAs and alimony) with tax-free foreign income counted.

For married couples, the credit starts to decrease at modified adjusted gross of $150,000 and disappears after $170,000.
When would I get the money from the credit?

You get the money only after you claim the credit on either your 2008 or 2009 tax return, NOT when escrow closes on the home.

However, you can speed up the process if you buy a home in 2009, prior to July 1. Instead of waiting until you file your taxes in 2010, you can after Dec. 31, 2008 treat the purchase as if it were completed in 2008. That means you can amend your 2008 return and get the credit in 2009.

How does the credit affect the taxes I owe and the refund I get?
The credit reduces your tax liability, that is, the amount of taxes you are required to pay. Depending on your tax withholdings, you could get a bigger refund or owe less in taxes when you file.

Here's some examples:

If, for example, your taxes owed for one year are $6,000, you’ve had $4,000 withheld from your wages, and you buy a home worth $100,000 (sales price over $75,000, credit is $7500), the housing credit would entitle you to a refund, as shown below.


Tax liability
$6,000
Minus housing credit
-7,500
Minus withholding
-4,000
Refund
$5,500


But if, for example, your tax liability was $10,000, but you had paid no withholding, then the credit would reduce the taxes you owe, as illustrated below.


Tax Liability
$10,000
Minus housing credit
- 7,500
Minus withholding
0
Taxes due
$2,500

How do I repay the credit?

You start repaying the credit in the second year after the tax year that the home was purchased.
So if you took the credit on your 2008 tax return, you begin repayment when you file your 2010 tax return. Your payments are set at $500 per year for 15 years.

They are “paid” as part of your tax liability. Depending on your tax situation, you either get $500 less on your refund each year, or you owe $500 more in taxes.

You might need to increase your withholding or make quarterly estimated payments to cover for the repayment and ensure that you don't get penalized for under-withholding.

What if circumstances change?

-If you sell the house before the end of 15 years, you will have to pay the balance remaining on the credit on the tax return for the year the house was sold.
-If you no longer use the home as your principal residence (say you rent it out), you pay the remaining balance on the tax return for the year the use changed.
-If you die before the 15 years, the balance does not need to be repaid.
-If you get a divorce and the home is transferred to your spouse, your spouse will be responsible for future payments.

Other considerations
The credit is not available if:
-You buy your home from a close relatives, such as your spouse, parents, grandparent, child or grandchild.
-Your home financing comes from tax-exempt mortgage revenue bonds.
-You are, or were, eligible for the District of Columbia first-time homebuyer credit for any year.

Call me with any questions you have about this program!