Interest Rates Hit 2018 High – What’s Next?
This article looks at 2018 interest rates, taking a cautiously optimistic approach toward being prepared for what the future brings.
Rising interest rates are a big deal, but not really. The reason I say this is that you’re always subject to the underwriting guidelines, and interest rates that are available at the time you are in a position to lock in an interest rate.
As rates rise in 2018, where do we go from here? Will rates go back down? Will they keep going up? Let’s take a closer look at what we know.
- 2018 Interest Rates – The New Normal?
- 2018 Tax Law Changes – Important Change
- Home Owners Interest Rate Opportunity
- Home Buyer Interest Rate Opportunity
- How Compound Equity Growth Works
2018 Interest Rates – The New Normal?
There have been rumors of 5% interest rates for over 2 years now. The only difference between then, and now, is that now it’s happening. The new normal for a Conventional home loan above 65% loan to value is going to fall into the 5% interest rate range.
How high will interest rates increase in 2018? That’s impossible to predict, all you can really do is listen to other people’s opinions, and look at the history of how these things work.
Increasing interest rates are a function of a normalizing of the mortgage backed securities marketplace. What would make interest rates drop, would be a mass exodus out of the stock market, and into long term treasury bonds.
I suspect that we will see interest rates in the mid to high five percent interest rate range, and possibly start seeing some in the 6% range on a conventional cash out above 65% loan to value, with a credit score under 680.
I believe that this is a normalized market, and what goes up, must come down….eventually. For the time being, we’re on our way up. As the economy moves forward, so do interest rates, and so does inflation.
I’ve got a few more opinions below about other perspective on a couple of different options if you’re a first time home buyer in this market.
2018 Tax Law Changes – Important Change
In 2018, new tax laws put new restrictions on first time home buyers that previous years’ buyers did not have to contend with.
Most importantly, this is a an accounting of tax laws as I understand them. I am not an attorney or CPA, and the lens of my interpretation are colored by my expertise in the mortgage industry.
Tax Deduction Ceiling
The maximum mortgage interest deduction on your primary residence has been lowered from $1,000,0000 to $750,000.
I understand that will not impact most people across the Country, so I file this ceiling as inconvenient, but not a deal killer for most people buying a home in 2018.
SALT – State and Local Taxes
One other tax deduction cpa that is going into effect in 2018 is the State and Local Taxes deduction, also known as SALT.
This deduction includes Property Taxes and State income taxes. In high cost State’s like California, these new tax limitations are very much a reality if you want to own a home.
State income taxes including property taxes are going to max out if you purchase a home greater than $750,000. That’s about the median home price in most of Southern California, and will benefit about 90% of home buyers.
HELOC Not Tax Deductible
This is a really tough one for many home owners. If your HELOC or second mortgage was used to purchase your home, the mortgage interest is 100% tax deductible.
If you use a Home Equity Line of Credit, or a cash out second mortgage against your home, you are unable to write off of the mortgage interest from this loan in 2018.
The constellation prize is that the standard deduction was doubled for every American across the Country. Most home owners may not even have to itemize their taxes to receive the full tax benefits of home ownership.
Home Owner Interest Rate Opportunity
If you are currently a home owner with a long term fixed rate, it’s going to take a life event or act of god before you should refinance your home.
If you’re up against a wall, and you absolutely need a fresh start, a sort of do-over button, a cash out refinance loan might be a valid option over the remaining months of 2018.
Even if interest rates on your home mortgage hit 6%, that’s at least 50% of less of the interest rate on your revolving and other high rate debt.
No, rates are no what they were, but they are what they are today. that’s the only thing we know for sure. If you need a fresh start, it might be worth a conversation with a mortgage expert.
Home Buyer Interest Rate Opportunity
Interest rates are only at a “High” or “Low” as it relates to a previous or future interest rate. This is a long and complicated way to simply say, interest rates are what they are, when you’re in a position to lock in your interest rate.
Historically speaking, interest rates are still very, very low. Even with interest rates creeping into the 5% and 6% range, home values are also increasing at the same time.
All things considered, you will never in your entire life find an investment opportunity profit power of leverage driving growth.
How Compound Equity Growth Works
As a home buyer, you’re inclined to compare your rent payment to a mortgage payment, and you couldn’t be further from the right math.
The mortgage payment is an orange compared to the apple of a rent payment. As a renter, you make your land lord’s mortgage payment every month. As a home owner, you pay yourself.
For the sake of this example, I am going to exaggerate the interest rate to 6% to make a point.
- Let’s say you put 5% down on a $250,000 home.
- Home Purchase Price = $250,000
- 5% Down Payment = $12,500
Even at a Conservative Rate, Home Equity should increase by 5% a year for at least the next few years. I’m not a fortune teller, but all inflationary markets are followed by a recessionary market. That’s a normal economic market, and looks to stand true for the foreseeable future.
Let’s look at the Compound Interest POWER of amplifying your minimal investment.
- Your initial investment of $12,500 purchased a home worth $250,000
- After 12 months (1 year), at a growth rate of 5%, your home is now worth $262,500
- After 24 months (2 years), at a growth rate of 5%, your home is now worth $275,625
- After 36 months (3 years), at a growth rate of 5%, your home is now worth $289,406
You get the point…..Let’s just stop there and review our math. You invested $12,500. Every month you made a mortgage payment, about $500 of that went to pay down your mortgage.
Using these rough numbers, you’ve already paid down your mortgage, and increased your equity by about $18,000.
If your home value has increase by a safe, 5% a year, your original $250,000 investment is now worth $289,406 only 3 years later.
That’s a $39,406 return on your initial investment represented by the home value over the next 36 months.
So, let’s put all of the numbers together….
Your initial investment was $12,500.
- Over the past 3 years, you’ve paid down your mortgage $18,000.
- Over the past 3 years, your equity has increase by approximately $39,406.
- Your total return on your initial investment is $57,406.
That’s a 459% return on your initial investment!
You think that home ownership is one of the best long term wealth building strategies available today? You bet your life it is! Do the math, pay your mortgage, build wealth. It really is that easy.
Working with a Mortgage Expert
Choosing the best mortgage based on your qualifications requires that you work with a professional loan officer that has experience with all of the options that are available to you.
All mortgage companies are NOT created equal. Big box lenders that advertise on TV, radio and the internet, often only target a very narrow qualifying criteria.
These popular lenders spend millions of dollars on marketing and advertising, only to dump you into a call center and put you in the hands of an inexperienced customer service telemarketer.
Big box lenders try to convince unsuspecting consumers that it’s the lender that matters, and never mention the fact that your loan officer is the gateway to you getting the best mortgage.
You should avoid these types of lenders at all costs if possible. They do not offer lower rates or better service, but they do have more money to convince you that they do.
Set Yourself Up for Success
The absolute first step to buying a home is to get your financing ducks in a row before you start looking for home. This means working with a mortgage professional.
Once you find an expert loan officer that you trust, ask them for an introduction to a local real estate agent that they trust. Even if the loan officer is not from the community that you’re buying in, they will still be able find an agent that rises to the level of professionalism you deserve.
Not sure where to find a professional loan officer that you can trust? You’re in the right place!
If you have any questions or comments about this topic, feel free to leave a comment below, or you can shoot me an email at firstname.lastname@example.org.
Now sure how to identify a professional loan officer? Watch these expert interviews I’ve done with professional loan officer friends of mine.
I firmly believe that once you hear how a professional loan officer communicates, it will help you to avoid silly mistakes and errors that are common with inexperienced or uneducated loan officers.