The new income tax bill goes into effect for tax year 2018. Many people are asking how this will effect mortgages and rates in 2018. For example, did you know the mortgage interest on a Home Equity Loan “HELOC” is no longer tax deductible under the new tax bill? I listed a summary below of the main points in the new tax bill that will affect home buyers and sellers and homeowners in 2018.

Rates Move Higher Following Passage of the Tax Bill

The new tax bill has already had an effect on mortgage rates. Rates rose to their highest level since the summer following congress passing the the tax bill, see chart below from Freddie Mac.

This is something to keep an eye on over the next month or two, as lower taxes and deregulation all add up to inflation, and inflation is the enemy of bonds and low rates.

Current mortgage rates are still very good historically. With a 740+ score and 20% equity, we can get a buyer 3.875% on a 30-year conventional fixed rate, 3.625% on a 20-year fixed rate, and 3.25% on a 15-year fixed rate.

FHA and VA 30-year fixed rates are around 3.5%.

If you or someone you know is planning on buying a home in 2018, or looking to refinance and lower the current rate, it would be a good idea to get approved for financing soon in case rates continue to increase.

The Impact of Rising Rates on Buyer Purchasing Power

Changing mortgage rates do more to influence home affordability than changing home prices. This chart below shows the impact of rising rates on a buyers purchasing power.

As you can see on the chart, when rates increase by just “.5%”, a buyer loses 5% in purchasing power. For example, see how the payment at the 4% rate on a $400k loan, is roughly the same payment as the 4.5% loan at $380k, a loss of 5% in purchasing power for a buyer.

A 1% increase in rates reduces a buyers purchasing power by 10%. For example, see how the payment at the 4% rate on a $400k loan, is roughly the same payment as the 5% rate loan at $360k, a loss of 10% in purchasing power for a buyer.

In a high cost market like San Diego for example, a 5% reduction in purchasing power means a buyer being able to afford a $570k home instead of a $600k home with the same monthly mortgage payment.

How Will the New Tax Bill Affect Mortgages in 2018?

Here are some of the main parts of the new tax bill that will affect homeowners, home buyers and sellers in 2018.

1. Downsized mortgage interest rate deduction: New home buyers would now only be able to deduct interest on the first $750,000 of mortgage debt on a newly-purchased home—down from the current $1 million threshold, but higher than the $500,000 limit the House proposed in its tax overhaul in November. The good news is that existing mortgages are grandfathered in.

The new cap would also apply to mortgages on second homes. The original House bill wanted to eliminate the deduction on second homes.

2. Interest on Home Equity Lines of Credit “HELOCs” are no longer tax deductible. This is for existing HELOC’s and new HELOC’s.

Solution. If you are looking to borrow money to pay for home renovations or payoff credit cards, doing a new first mortgage cash-out refinance will probably be a better option, as you can still deduct the interest on the loan.

3. Limit on property tax deduction: Taxpayers will no longer be able to fully deduct state and local property taxes plus income or sales taxes. Instead, the legislation allows individuals to deduct up to $10,000 in state and local income and property taxes or state and local property and sales taxes.

That means homeowners living in high-tax states like New York, California, and New Jersey for example, could see an increase in what they owe.

4. Tax break stays for home sellers: Both the House and Senate bills originally wanted to scale back a tax break for homeowners when they sell their home for profit. Taxpayers will still be able to exclude up to $500,000 (or $250,000 for single filers) from capital gains when they sell their primary home, as long as they’ve lived there for two of the past five years.

Earlier tax reform proposals would have increased the live-in requirement to five out of the last eight years, so this is good news this is staying in place.

Top 4 Low Down Payment Options for Home Buyers in 2018

There are some excellent low down payment options available to all buyers to help them buy a home in 2018. With the new higher Conventional, FHA and VA loan limits available for 2018, see HERE, here are the top 4 low down payment purchase programs available for home buyers in 2018.

1. If you need to borrow up to $453k, you can buy a home with only 1% down conventional financing with No monthly mortgage insurance “PMI”.

We can also give a buyer a lender credit to help towards their closing costs.  Click HERE here for more details how to qualify for this 1% down program.

2. If you need to borrow over $453k and up to $679k, you can buy a home with only 5% down conventional jumbo financing with No monthly PMI.

All of the down payment can be gifted too. We can also give a buyer a lender credit to help towards their closing costs. Click HERE here for more details how to qualify for this 5% down program.

3. Military buyers can purchase a home up to $679k with zero down payment. We can also give a buyer a lender credit to cover all their closing costs. Click HERE for more info on how to qualify for zero down VA financing.

4. You can buy a home with only 3.5% down FHA financing up to a loan amount of $679k. All of the down payment can be gifted too.
We can also give a buyer a lender credit to cover all their closing costs. Click HERE for more info on how to qualify for FHA financing.