Northern Virginia Real Estate Blog

Today is Tax Day so here’s some IRS-related trivia to share at the water cooler:

Did you know… President Lincoln and Congress enacted the first income tax in 1862 to pay Civil War expenses.

Did you know… The Civil War income tax was repealed in 1872, revived by Congress in 1894, and ruled unconstitutional by the Supreme Court in 1895.

Did you know… In 1913, Wyoming was the deciding vote in the 16th Amendment which gave Congress the authority collect income tax.

Did you know… The first income tax was 1 percent on net personal incomes above $3,000. There was a 6 percent surtax on incomes over $500,000.

Did you know… The first 1040 form was 4 pages long — including instructions. Today, the instructions ALONE are 92 pages.

Did you know… During World War I, the highest rate of income tax was 77 percent. Taxes were used to help finance the war.

Did you know… In 1954, the tax filing date changed from March 15 to April 15.

Did you know… Electronic filings started in 1986. Today, e-filings have an error rate of 0.5 percent versus an error rate of 21 percent for paper filings.

And remember: If you don’t file tax returns, the Treasury Department won’t send your economic stimulus check. Happy April 15, everyone.

Source
A Brief History of the IRS
IRS.gov
https://www.irs.gov/irs/article/0,,id=149200,00.html

Getting approved for a conforming home loan just got tougher.

Again.

As home loan defaults mount, government-sponsored financier Fannie Mae has imposed new guidelines on what it will lend and to whom, highlighting the need for a strong credit profile and a downpayment.

Some of the new restrictions on home buyers include:

• 580 minimum credit score requirement on all home loans (which 85% of Americans have)
• No more than one instance of a 60-day late payment on a mortgage in the last 12 months
• 5-year moratorium on new mortgage credit with a prior foreclosure on record

In other words, Fannie Mae is outright declining mortgage applicants whose credit is weak and whose payment history shows signs of trouble. But, it’s not just the “fringe” borrowers that are finding it harder to get a mortgage.

Buyers with strong credit profiles are being hit by new changes, too.

One such change says that owners of second homes must now have a 10 percent equity position in their homes; 15 percent if the property is in a “declining market”.

This is up from 5 and 10 percent, respectively, and represents a growing trend to make homeowners have a “stake” in their own homes. Downpayment requirements are higher for all mortgage products, in general.

Fannie Mae’s changes are the third set of restrictions imposed since December 2007 and more tightening is expected over the next few months. That makes now a compelling time to buy a home — borrowing money will be more restrictive (and more costly) later.

If you are actively shopping for homes and have not been pre-qualified in the last few weeks, reach out to your loan officer and get checked against the latest set of mortgage guidelines.

It’s better to know today than after you make an offer.

(Image courtesy: myFico.com)

Every two years, the Jump$tart Coalition issues a “personal finance” exam to high school seniors.

The test highlights the importance of personal financial literacy among America’s youth and comes at an especially important juncture.

Many experts — including Fed Chairman Ben Bernanke — believe that basic financial knowledge is essential for (and lacking in) teenagers. Jump$tart’s exam did little to disprove this.

This year, 12th graders answered 48.3% correct on average and posted the lowest scores since Jump$tart first issued the test in 1996.

A sample question from the 31-question test:

Which of the following types of investment would best protect the purchasing power of a family’s savings in the event of a sudden increase in inflation?

1. A twenty-five year corporate bond
2. A house financed with a fixed-rate mortgage
3. A 10-year bond issued by a corporation
4. A certificate of deposit at a bank

Find out the answer to the sample questions and 30 other questions by taking the complete Jump$tart Personal Financial Literacy test for yourself online.

The average adult scores 68%.

In three weeks, the Federal Open Market Committee will meet again and markets anticipate another cut to the Fed Funds Rate.

Based on data compiled by the Federal Reserve Bank of Cleveland at the close of business yesterday, traders put the probabilities of the Fed’s next move at:

• 62 percent chance that the Fed Funds Rate falls to 2.000%
• 36 percent chance that the Fed Funds Rate falls to 1.750%

Currently, the Fed Funds Rate is 2.250%.

Cuts to the Fed Funds Rate are meant to stimulate the economy by lowering borrowing costs for banks, businesses, and consumers. When less money is spent on interest payments, more money is available for goods and services and that tends propels the economy forward.

And, because Prime Rate is tied to Fed Funds Rate, home equity lines of credit and credit cards grow “cheaper” when the FFR falls. That can makes financed home improvement projects a little less expensive.

Cuts to the Fed Funds Rate, however, do not equal cuts to mortgage rates - this is a pretty common misconception.

Mortgage rates are based on the price of mortgage bonds and — although it exerts an influence — the Federal Reserve does not set the prices for mortgage bonds any more than it sets the price for other investments such as stocks or mutual funds.

Since September 2007, the Federal Reserve has lowered the Fed Funds Rate by 3 percent. Over the same period of time, conforming mortgage rates have been mostly unchanged.

News sources like to use the term “credit crunch” in describing the U.S. economy, but they rarely define what a credit crunch is and what it means for Americans.

A credit crunch is when the amount of available loans suddenly decreases over a very short period of time.

Usually, it follows a period of lending which, in hindsight, becomes known for its “easy money”.

The start of a credit crunch often coincides with consumer loans starting to go bad and lenders losses starting to mount.

The realization that more losses are ahead forces lending institutions to tightening their respective lending guidelines.

Since the current credit crunch began in mid-2007, Americans looking for credit now face:

• Higher credit score requirements on auto loan applications
• Higher fees and interest rates on credit cards
• Larger downpayment requirements on their home purchases

And now, the newest symptom of the credit crunch: the largest buyer of mortgage loans — Fannie Mae — has instituted a new, 580 minimum score requirement for all mortgage applicants.

As consumer delinquencies mount and the economy continues to sputter, getting access to credit will likely get tougher for every American — good credit and bad.

And that’s the defining characteristic of a credit crunch.

Source
Credit Crunch
Wikipedia, April 8, 2008
https://en.wikipedia.org/wiki/Credit_crunch

For it’s simplicity, comfort, and “green” status, radiant heating is a growing trend in home building.

Radiant heating is the process by which a room’s temperature is controlled using warm (or cold) water flowing through plastic tubing. The tubes are typically installed under the room’s flooring, but are also applied in walls and ceilings on occasion.

Radiant heating works by heating the floors of a room which then heats the mass of the room. Unlike air duct systems, the heat stays lower in the room and temperature remains constant throughout.

There are other reasons why homeowners and builders are moving towards radiant heat, too:

1. Dust- and mold-circulating air ducts can be eliminated making the home more allergen-free
2. Without ductwork, heating and cooling is much more quiet
3. Heating bills are lower by up to 20 percent because the water in the pipes doesn’t need to be as hot as the water in a traditional radiator

That said, installing radiant heating can be expensive.

Radiant heating is recommended for construction projects in which rooms are completely gutted, or for a new room additions to a home, or for new homes built from scratch.

Homeowners wanting to retrofit a room (or rooms) for radiant heating should talk to an experienced contractor for opinions and cost comparisons.

Source
Perks of Radiant Heating
Leslie Banker
REALTOR.org
https://www.realtor.org/RMOArch.nsf/pages/ArchCoach200802?OpenDocument

(Image courtesy: Moser, Inc)

For the third month in a row, the economy shed jobs, suggesting that the U.S. is in a recession.

March’s monthly loss of 80,000 jobs is the largest since March 2003 and follows January and February’s losses of 76,000 each. The weak data is edging mortgage rates lower as we head into the weekend.

The connection between poor jobs data and today’s falling mortgage rates is a little bit strained, but worth discussing. It all comes down to expectations.

Prior to today, there was an expectation that the Federal Reserve’s recent rate cuts would over-ignite the economy sometime this Summer. The Fed has cut 3 percent from the benchmark rate since September 2007.

Meanwhile, consumer spending makes up two-thirds of the economy and people can’t spend if they don’t earn.

So, after today’s report showing fewer workers (and falling confidence levels to boot), the largest component of the economy is expected to sag for a while.

This lack of spending should offset the cumulative impact of the Fed’s rate cuts and lowers the expectation for runaway inflation later this year.

Now for the connection: If inflation causes mortgage rates to rise, it’s the absence of inflation that causes them to fall.

And that’s precisely what we’re seeing today.

To see which method gives tax filers the “biggest bang for the buck”, ABC’s Good Morning America recently compared three popular tax preparation services:

1. TurboTax
2. H & R Block
3. Personal accountant

In declaring TurboTax the “winner”, the 4-minute video glossed over several important tax-related items.

The first is that true tax planning cannot happen in a 3-hour stint in front of a computer. Tax planning a year-round activity.

The second is that all personal financial decisions should be evaluated for their tax implications. That can’t happen without a personal accountant that knows your tax history and understands your financial goals.

The third is that filing income taxes is a personal event. The “winning” tax preparation method for the family on TV may not be what’s best for your family.

If you’d like a referral to a trusted accountant, please ask me. Filing your taxes for cheap today does not mean it will be the lowest cost to you long-term.

More commonly called “points”, discount points are up-front fees charged by mortgage lenders in exchange for lower mortgage rates.

The cost of one point is one percent on the loan size and discount points appear on Line 802 of the HUD-1 Settlement Statement.

As a general guideline, each point paid lowers a mortgage lender’s offered interest rate by 0.250%.

For example, a $200,000 home loan offered at 6.000% can be had for 5.750% if the borrower agrees to make an up-front payment of one point ($2,000).

In addition to lowering your interest rate, discount points (as well as other closing costs) may be tax-deductible, too. Therefore, be sure to provide any settlement statements from the previous calendar year to your accountant during Tax Season.

FHA stands for Federal Housing Administration, a by-product of the National Housing Act of 1934 and now a sub-group within the U.S. Department of Housing and Urban Development (HUD).

The FHA is not a lender nor does it build homes.

The FHA exists to insure lenders against loss in the event that a homeowner defaults on a mortgage.

Mortgages backed by FHA are often called “FHA loans” even though it’s somewhat of a misnomer. A more appropriate name would be “FHA-insured” loans because that better describes the FHA’s function.

With the FHA’s guarantee, mortgage lenders are enticed to make loans on which they would otherwise pass and the explicit backing from the government holds mortgage rates low for borrowers.

FHA loans are often used by borrowers with less-than-20-percent downpayments and, therefore, tend to require mortgage insurance payments.

For FHA loans above 80%, mortgage insurance rates are 0.50% annually (paid monthly) with an up-front payment of 1.5% against the loan size and due at closing.

Homeowners with 15-year fixed FHA loans, however, are exempt from the annual insurance payments.

For all homeowners, though, when the loan balance reaches 78 percent of the home’s value, the annual MI is no longer required.

Mortgage rates for FHA loans are typically higher than comparable conforming mortgages but because of new, risk-based pricing from Fannie Mae and Freddie Mac, homeowners with credit scores under 680 are finding FHA a viable alternative.

And often with lower rates.

Source
FHA Loan
Wikipedia, April 1, 2008
https://en.wikipedia.org/wiki/FHA_loan