Rates, tax law impact mortgage industry

Mortgage interest rates in 2018 have, until very recently, been steadily rising. According to Freddie Mac data, the 30-year fixed-rate mortgage rose over a quarter of a percentage point, or 27 basis points, in January. The 15-year fixed-rate mortgage rose from around 3.38 percent in early January to around 3.68 percent in February.

After nine consecutive weeks of increases, rates dropped slightly for the first time all year in mid-March, with the 30-year fixed-rate mortgage averaging 4.44 percent, down from 4.46 percent. A year ago at this time, the 30-year fixed-rate mortgage averaged 4.30 percent, so while this recent drop indicates inflation may be cooling down, rates still remain higher than in recent years.

The steady increase in interest rates, combined with increased property taxes and more expensive homes is causing some concern for Coloradans planning to buy a home in 2018.

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“Up until two years ago the prices (in Northern Colorado) were incredibly low relative to rents, so going into 2018 with rising interest rates is putting a lot of pressure on folks because they’re kind of getting hit in three ways,” said Justin Crowley, senior mortgage loan originator for First Western Trust’s Northern Colorado mortgage office. “One is that the average home price has risen significantly from two years ago. Number two, the property taxes are up, and then they kind of get that third punch of higher interest rates. So, most of the surprise that we’re hearing from people in the area is due to a combination of all three: the price, the taxes and the rates.”

Still, Crowley hasn’t seen a dramatic reduction in the number of buyers as a result of increased rates, but he said there are fewer opportunity buyers now than in previous years. Opportunity buyers, he said, are those who already owned a home, wanted to buy a new home and were planning on selling their existing home, but because rates and payments were so low, and rents were so high, they decided to buy a new home and keep their existing one as a rental property.

“That has kind of contributed to a little bit of a shortage of inventory,” said Crowley. “And those situations are much fewer and farther between now, and a lot of that has to do with rates.”

Crowley and other industry professionals, like Sara Hart, a home loan consultant with Cornerstone Home Lending, Inc. in Fort Collins, are seeing fewer customers who want to refinance in light of rising interest rates.

“The gradual uptick in interest rates has drastically reduced the number of clients refinancing,” said Hart. “Probably 80 percent of the mortgage business today is purchase business.”

Recent changes to the U.S. tax code could also have an impact on the mortgage and refinancing industry, though Hart said she hasn’t seen much of an impact on the average homeowner.

“The change in tax laws regarding the mortgage deductibility hasn’t had a great impact on our industry,” said Hart. “Although more borrowers would benefit from taking the standard deduction versus itemizing (on tax returns), Americans still want to own their homes and will continue buying. However, it will affect those borrowers with million-dollar mortgages.”

While Crowley agrees that this change hasn’t quelled buyer demand yet, he said the topic is coming up more frequently in conversations between brokers and buyers, especially with first-time buyers. Traditionally, he said, how the purchase will impact a buyer’s taxes has been a great selling point for brokers.

Take for example, said Crowley, a buyer who recently graduated from college and entered the workforce. He or she is making good money, has no deductions at all and is paying rent. That person may end up with a mortgage that’s $100 or $200 more than their rent, which can be a shock to a first-time buyer.

“So, you would look at it on paper and go, well, because of the tax deduction of your mortgage interest, you’re actually going to take home more of what you’re already making,” said Crowley. “For example, a $1,700 mortgage payment was really costing the same as, for example, a $1,500 rent payment.”

“Because they have now doubled that standard deduction — very few people in Northern Colorado are going to spend more than $24,000 a year between their mortgage insurance and their property taxes — those first-time home buyers, where (the tax deduction) was originally one of the incentives to renting versus buying … aren’t really going to see that as an incentive anymore.”

In a nutshell, said Crowley, buyers really aren’t going to get a big tax break by owning a home under the new tax law unless they’re buying at a higher price point.

While these changes can be worrisome to potential homebuyers, it’s important to look holistically at the entire economy to help keep things in perspective, said Crowley.

“Yes, we’re at a rate point that’s well above where we’ve been for the last several years, but it’s important to keep in mind that these rates are still historically very, very low,” said Crowley. “When rates go up, it’s not just mortgage rates that are going up, it’s also usually that savings rates go up and all kinds of other things go up, too.”

“You also have to consider that most people are going to take home a lot more of what they make in their paychecks because of the new tax laws and that they’re going to earn more on their savings. Also, the economy and the market (in Northern Colorado) is robust and people’s incomes are a lot higher than they were before; so, with all those things combined, it’s not such a bad thing. In fact, I wouldn’t necessarily look at it as rates are rising. I more look at it as rates are returning to where they really should be. I know it’s hard for people to really appreciate that when they’re the one taking out the loan, but it’s important to keep that in perspective.”