Slicing Through Money's Mysteries
When there are mortgage market abnormalities, we must take advantage to get the lowest rate and best terms possible.
There are two mortgage abnormalities to be aware of:
1) The average 15-year mortgage rate is way below the average 5/1 ARM rate.
and
2) The average 30-year mortgage rate has been going down while the 10-year bond yield has been going up.
The US government has blessed us with the ability to deduct our mortgage interest expense from our income. This thereby can lower our tax liability. The maximum mortgage tax deduction ultimately depends on income, which I’ll get into below.
Although you could deduct mortgage interest on up to $1 million in mortgage indebtedness in the past, that’s no longer the case. The amount was lowered to $750,000 due to the Tax Cut & Jobs Act passing in 2017 for 2018 and beyond.
While the decrease is unfortunate for property owners with large mortgages, at least we still have something. If you go to Canada, Australia, Asia, and Europe, there is no such mortgage tax deduction benefit. Then again, at least they’ve got cheap healthcare!
That said, mortgage rates have collapsed in 2020 and many homeowners hav smartly been able to refinance their mortgages. If you haven’t taken advantage of record-low mortgage rates yet, get a free mortgage rate quote with Credible. Credible is one of the leading mortgage lending marketplaces where qualified lenders compete for your business.
I personally was about to get a 7/1 ARM jumbo for only 2.125% and minimal fees in 2020!
To understand the maximum mortgage tax deduction, we should first do an overview of the marginal income tax rates in America.
One of the most common paths to building wealth is through homeownership. However, when there isn’t a level playing field for all people to buy a home, then there’s a problem. This article looks at mortgage interest rates by race to see if there are any differences.
Below is a chart highlighting mortgage rates by race by Pew Research. The chart is from 2015 when mortgage rates were much higher than they are in 2020. However, the data is being used to form a baseline.
The first area of the chart to look at is the ALL row to find your baseline. Then you compare the ALL percentage with the percentage next to each race by mortgage rate.
For example, 31 percent of all races paid a mortgage rate of between 3 – 3.9 percent. In comparison, only 25 percent of Blacks paid a 3 – 3.9 percent mortgage rate. Conversely, 38 percent of all Asians paid a 3 – 3.9 percent mortgage rate.
Said differently, 19.35% fewer Blacks paid a mortgage rate of 3 – 3.9 percent compared to all races. Conversely, 22.5% more Asians paid a 3 – 3.9 percent mortgage rate than all races.
Thankfully, mortgage rates between 4 – 5.9 percent don’t look too distorted across all races compared to the baseline.
Notice how the All row percentages are very similar across all mortgage rates to the Whites percentages. This is likely because Whites are the majority race in America.
Obviously, it is better to have a higher percentage of your race paying the lowest mortgage interest rate. With mortgage rates at-or-near all-time lows, hopefully, every race is taking advantage.
For the longest time, I’ve been a proponent of the adjustable rate mortgage (ARM). Paying a higher rate for a longer duration than necessary doesn’t make economic sense. However, with the average 30-year fixed mortgage rate now under 3%, the bias is no longer as heavily weighted towards adjustable rate mortgages.
A sub-3% average 30-year fixed mortgage rate is so low, it must be spurring more people to buy homes.
With a global pandemic still raging on, I am curious to know who is buying a home in this environment. Let’s read some homebuyer profiles of people taking advantage of record low mortgage rates.
As soon as your real estate offer gets accepted, you notify your lender with the relevant ratification documents and lock in a rate. The rate lock is usually for 30 – 60 days. However, sometimes things take longer than expected and you need to get a mortgage interest rate extension. A mortgage interest rate extension is also sometimes called a rate lock extension.
A rate lock is a guarantee assuring that a mortgage lender will honor a specified interest rate at a specific cost for a set period. If mortgage rates go up during the rate lock, the lender will still keep your mortgage rate the same. If mortgage rates go down during the rate lock, you can ask for a new rate lock.
Given the rate lock is usually only for 30 – 60 days, there is pressure on borrowers to make sure they close on homes before the rate lock period expires. If it’s looking like the property will not close within the initial rate lock period, you may need to pay a mortgage rate extension fee.
The ideal mortgage amount was $1,000,000 before the Tax Cut & Jobs Act was passed for 2018 and beyond. The reason why $1,000,000 was ideal was because that was the mortgage limit for where you can write off the interest. Today, that ideal mortgage amount is $750,000 because $750,000 is the maximum mortgage you can take to be able to write off the mortgage interest.
Back in 2002, a $1 million mortgage cost around $50,000 to $65,000 a year in interest expense given mortgage rates were 5%-6.5% for a 5/1 ARM or a 30-year fixed. Multiply the annual interest expense by three, and you get $150,000-$195,000, the minimum annual income recommended to take out such a loan.
In 2020, a $1 million mortgage costs around $25,000 to $32,500 a year in interest expense given mortgage rates are now ~2.5% for a 5/1 ARM or ~3.25% for a 30-year fixed after interest rates plummeted to all-time lows due to coronavirus fears.
Multiply the annual interest expense by three again and you get $75,000 to $105,000, a far cry from the $150,000 – $195,000 in income you originally needed to make! As a result, buying real estate looks attractive in 2020+ because affordability has gone way up.
Before buying a home in the midst of a pandemic, you need to understand the state of the mortgage industry. This information is vital if you want to make the best purchase possible with the information available.
I’ve kept in touch with the mortgage lender representative who refinanced my previous home in 2019. He works for one of the top five largest banks in the country and is a top 20% producer in his department. In other words, he knows exactly what is going on in the mortgage market from the inside.
The housing market is heating up for a number of reasons:
If you doubt my assertion that real estate is heating up, mortgage-purchase applications reached an 11-year high in May 2020. I’m pretty sure the index will continue to be high in June and beyond. The intent to buy property is very strong for properties hovering around the median price.
There are two things everyone should do before leaving your job: 1) Negotiate a severance package and 2) refinance your mortgage. If you do both, you are going to significantly improve your finances in the next stage of your life.
Back late January of 2012, I had a strong suspicion I was going to engineer my layoff in the coming months. I had worked at my company for 11 years and I was looking forward to doing something on my own. As a result, I knew I had to do as much as possible to lower my expenses before taking the leap of faith.
One of my biggest recurring expenses is my mortgage. Even though my initial mortgage rate from eight years ago has dropped from 5.75% down to 2.625%, spending thousands of dollars a month is still a lot of money for someone who no longer has W2 income. Every dollar of interest savings counts!
When the 10-year treasury yield dropped to 1.85%, I gave my bank a ring to see what they could do. Amazingly, they came back with a 5/1 ARM rate of 2.625% with “no cost no cash” outlay. The process started around January 27, 2012 and didn’t end until early May, 2012, 100 days later!
At the end of April (day ~80), the bank asked me AGAIN for my latest two paychecks. I clearly remember thinking to myself, Thank goodness I still have a job!
I told my bankers that it was likely I would no longer have a W2 income stream come summer just to be completely up front. They thanked me for my honesty and pushed my refinance through because they said we cannot predict the future. We have a 11 year relationship and I don’t plan on defaulting on my mortgage anyway.
The beauty of an economic downturn is cheap credit. After a shaky 2018 and a bullish 2019, 2020 has turned out to be a complete mess. As a result, every homeowner should be refinancing their mortgage right now as rates fall to all-time lows. Here are some home mortgage refinancing tips.
Since 2003, I have refinanced five properties over a dozen times. These home mortgage refinancing tips are straight from experience. As a result you can pay the lowest fees and get the lowest interest rate possible.
Check the latest mortgage rates online through a marketplace like Credible. They have one of the largest lending networks around. There’s no obligation and you’ll get real quotes from qualified lenders in minutes.
Refinancing can be a daunting process, but it shouldn’t be with the right representative and proper frame of mind.
I refinanced my primary residence in 4Q2019 with a 7/1 ARM at 2.625% with no costs. In 2020, I got preapproved for a 7/1 ARM at only 2.125% because interest rates declined even further! I do have relationship pricing because I’ve got over $1 million in assets with the lender. But even if I didn’t, I could get a 7/1 ARM for only 2.5% in 2020.
As someone who has refinanced over 10 mortgage loans since 2005, let me share with you my mortgage refinancing tips to help you get the best rate possible.
Yes, you can get a mortgage in one state to buy a property in another state.
Due to the extended lockdowns, I’m more motivated than ever to relocate from San Francisco to Honolulu. I have been looking seriously at Honolulu property since 2015 and I’m finally seeing some great deals in the area.
My logic for moving is this: If I’m going to shelter-in-place for months on end in the future, why not shelter-in-place in a nice property that has plenty of land, lots of indoor space, a pool, a hot tub, a garden, good weather, and is close to the beach?
When you have kids, you crave for as much space as possible to enable them to run around and have fun. Hearing their screams of delight is so wonderful.
Given we have enough passive retirement income to sustain our lifestyle, there’s really no need to remain in expensive San Francisco.
