Everybody and their dog from TV and Radio is going to be advising you to go out and buy a house.  If you are smart and in the know you will hear it first here at the Oklahoma City Real Estate Blog. 

The Fed said Wednesday that it would put over a Trillion Dollars into the economy.

$300 Billion Dollars of Long Term Treasuries.

Another $750 Billion Dollars of Mortgage Backed Securities.

Purchase of Freddie and Fannie debt of up to $200 Billion Dollars.

Keep the Fed Fund Rates between 0 and .25 for a long time.

What does this all mean?  It means interest rates are going down and the Fed has got your back.

How do you take advantage of this.  Buy a house and find it quick.  The ridiculously low interest rates along with the First Time Home Buyer’s Tax Credit is going to heat up the market.  The builders have quit building.  There is over three years of pent up demand for housing and when they come flooding back in the supply will not be there.  I know there is a lot of supply but when you subtract all the busted up foreclosure that most do not want or can’t get financing for you have very few houses.  I will say it again there are very few good houses on the market for serious buyers and as the army of sideline buyers enter the game, prices on good homes are going to go up.  So in short, if you do not move quickly you will pay more for your house and you will be talking about the chance that you missed.  If you wait for the statistics to show this or you are waiting for all the reporters to tell you now is the time to buy a house you are going to miss the boat.  If you want to hear someone call a bottom to the housing market.  Here it goes. 

 This is the bottom of the housing market. 

If you buy a house now you will be rewarded.  There you  have it.

Joel Garcia

The new stimulus bill has been signed and in it was included the latest incarnation of The First Time Home Buyer Tax Credit.  So here is what you need to know.

 

 

First Time Home Buyers

First time home buyers are eligible for the tax credit.  People who have not owned a home in the last three years are considered First Time Home Buyers and are eligible for the First Time Home Buyer Tax Credit.

Income Limits

For the full credit you must make less than 75k if you are single and 150k if you are married.

2009

The Tax Credit is for First Time Home Buyers who purchase a home as a primary residence in 2009.

$8,000.00

The tax credit is 10% of the home purchase or $8,000.00 whichever is less.

No Payback

The old $7500.00 tax credit had to be paid back over 15 years.  The new tax credit is a freebie.  No payback as long as you live in the home for 3 years. 

Refundable

This means you get a check.   Unlike a deduction which just reduces your tax liability, the new first time home buyer tax credit drops straight to the bottom line.  Figure out what your taxes are without the credit then move the number $8,000.00 in your favor.  Example: without tax credit you owe $3,000.00.  With Tax Credit you get a sweet check for $5,000.00.

I usually like to end with a call to action like now is a great time to buy a house, but if you can’t do the math on this one then maybe you shouldn’t buy a house.  If you have any questions about the details email me.  If you are ready to get started looking for a new home email me.  Carpe Diem.

Joel Garcia

So you are looking to buy a new home and you are hearing about discount points.  Or you already know something about discount points and you think you have the answer.  Here is the mistake buyers often make is they base decisions on their past experience.  They don’t realize how fluid the mortgage market is.  The problem is more than likely their experience is take from their experience with very few real estate transactions.  What you need to understand about the real estate industry is that there are no timeless universal correct answers.  

The game of real estate changes dramatically year to year, month to month, and even week to week.  This is why you cannot rely on your own experience of the past.  You cannot rely on experience of others from their past.  You need to educate yourself the best you can with current information and find a Realtor that is honest and actively selling houses every month that can help guide you.

Discount points are pre-paid interest that change the interest rate you pay over the term of the loan.  Here is the question, “Are Discount Points a good Idea?”.  Well it depends.  First, let me tell you upfront I am writing this because Discount Points have become a much better idea in the past few months.  Why?  Well.  It is all just math.  How much is a Discount Point.  One point is equal to 1% of the loan amount, so if you have one point on $150,000.00 then you will pay $1500.00 at closing.   Take for example the following choice.  One loan has one discount point and an interest rate of 5% and the other has no discount point and a 6% interest rate which one do you want?  Well, let’s look at it.

You would calculate it this way.  First you figure out the difference.  With the loan up front you will pay $1500 at closing but your monthly payment will be $805.00(refer to chart from previous post).  With no points you will not have the $1500.00 at closing but with your interest rate at 6% your monthly mortgage payment will be $899.00(refer to chart).  So which is better?  Well it depends on how long you will be living in your new home.  With one you save $1500 but pay $94 more a month.  A simple calculation 1500/94=15.96, shows that if you are going to be there for more than 16 months you will be saving quite a bit money with the first choice of the discount point.  If you plan on moving in less than f16 months than you should choose the one with no points.

The difference a point makes in the actual interest rate will vary at different times.  In the current market the above example is about right.  You save a point on interest for every discount point.  Three years ago it was more like you save 3/8 of a point on interest for every discount point.  You can see the calculations would be very different.

This is just a very small part of understanding which is the best loan right now.  So again I would recommend that you do lot’s of homework and find a knowledgable Realtor.  Selecting the wrong loan could cost you thousands over the life of the loan.

Ask questions.  Don’t be shy.  Very few have a full understanding of all the complexities of the process.  Even the veterans we see that think they have it all down usually only have a working knowledge of the surface.

 

Just between you and me.  I think Lenders purposely try to make it complicated to make it easier to sell you a product that may be good for them but bad for you.  Don’t let this happen.  Knowledge is Power.

Joel Garcia

I shall never use profanity except in discussing house rent and taxes.  ~Mark Twain

 

And being that I am from Oklahoma I must include a quote from our favorite son Will Rogers.

 

If you make any money, the government shoves you in the creek once a year with it in your pockets, and all that don’t get wet you can keep.  ~Will Rogers

 

Now in fairness Oklahoma has much lower property taxes than many places across our country.  But in extending fairness most of these places that have much higher property tax do not have state income tax or have much lower state income tax.  In short taxes are a certainty it is just a matter of nomenclature that adds diversity.

The particular type of tax of which we are speaking is called ad valorem.

 

“Ad valorem” is a latin term meaning according to value.  Oklahoma property taxes are based on the fair cash value of a property.  So, the more expensive your home the more taxes you pay. 

 

Now you may wonder how do they arrive at this amount that I must pay.  Well first they determine what tax district you are in.  Different tax districts have different tax rates because there are different things that your taxes go towards.  Everyone in Oklahoma County pays the county.  But some may pay one city or the other or no city.  Some may be paying towards a particular school district or vo-tech.  Your property taxes are broken down into four parts.  One part goes to your city if you have one.  One part goes to the school system you are a part of.  One part goes to a vo-tech or junior college and the final part goes to the county.  The amount you pay to the county is the same county wide but all the other parts are different from district to district.

So to help make this clearer I have chosen one particular property to break down the numbers.  I won’t tell you the actual address that I have chosen but I will tell you that I chose it because it was in the highest district in Oklahoma County.  Tax District 206.  If you are lucky enough to be in the highest district then you will be getting a precise example of how your property taxes are spent.

So to start off we must determine how much Lucky Guy’s home is worth.  The tax assessor has determined that the Market Value is $343,615.00.  The market value is what the assessor has determined that a reasonable informed buyer would pay for this property if it was on the market.  From the Market Value we derive the Taxable Market Value which will often be the same if the home was recently sold.  The Market Value and Taxable Market Value can differ though because if no sale has occurred and no improvements have been made then the Taxable Market Value can only be increased by 5% annually whereas the actual Market Value may have increased by more than 5%.  In a hot market this is often the case.  But in a cooler market where a purchase has occurred recently then most often the Market Value will be equal to the Taxable Market Value.

In our example the Taxable Market Value is the same as the Market Value.   The Taxable Market Value is $343,615.00 

Next we take the Taxable Market Value and multiply it by .11 to find the Gross Assessed Value.  In our Example the calculation would look like this: 343,615 * .11 = 37797(rounded down to the whole dollar)

Next we determine if there are any exemptions.

 

Homestead Exemption is an exemption of $1,000.00 of the Gross Assessed Value.  To qualify the following conditions must be met: You must be the homeowner who resides in the property on January 1. The deed must be executed on or before January 1 and filed with the County Clerks Office on or before February 1. You must be a resident of Oklahoma.  In our example you would subtract 1,000 from the 37797(Gross Assessed Value) to equal 36797(Net Assessed Value).

If you meet these requirements then you simply fill out the proper form and mail it back to the county assessor’s office.

 

Additional Homestead Exemption – If you are head of household and qualify for homestead exemption, you may also qualify for additional homestead. You may receive an additional $1,000 assessment exemption if the gross household income from all sources did not exceed $20,000 for the past calendar year.  In our example if you received the Homestead Exemption and the Additional Homestead Exemption the calculation would  look like this: 37797(Gross Assessed Value) – 1000(Homestead Exemption) – 1000(Additional Homestead Exemption) = 35797(Net Assessed Value).

If you meet these requirements then you simply fill out the proper form and mail it back to the county assessor’s office.  The form is only available between January 1st and March 15th.

 

Senior Valuation Freeze – If you qualify for this then your Taxable Market Value will be frozen after the next years calculation and will not increase anymore. In our example if the Taxable Market Value was calculated to be the same for the next year at $343,615.00 and you qualify for the Senior Valuation Freeze then your Taxable Market Value would stay at 343,615.00  for all future years. It would not increase with the Market Value. To qualify for the Senior Valuation Freeze you must meet the following requirements:

(1) Head-of-household must be age 65 or older prior to January 1, 2008.

(2) Head-of-household must be an owner of and occupy the Homestead property on January 1.

(3) Gross household income cannot exceed $53,600 for the preceding calendar year. 

(4) An application for Senior Valuation Freeze must be filed between January 1 and March 15th, or within thirty (30) days from and after receipt by the taxpayer of notice of valuation increase, which ever is later. The freeze will take affect for the taxable year in which the application is made and approved. No annual application is required.

(5) The application must be completed in its entirety regarding income, age, ownership, and other information for the freeze to be valid.

 

If you qualify then you simply fill out the form and submit it within the proper time frame.

 

100% Disabled Veterans Exemption – This exemption would be for the full fair cash value of the homestead, meaning you do not pay property taxes. This exemption is for certain injured veterans and their surviving spouses.  To qualify the injured veteran must meet these requirements.

·         First, the veteran must have been honorably discharged from a branch of the Armed Forces or the Oklahoma National Guard.

·         Second, the veteran would have to be a State resident.

·         Third, the veteran would have to have a 100% permanent disability.

·         Fourth, the disability would have to have been sustained through military action or accident, or result from a disease contracted while in active service.

·         Fifth, the disability would have to be certified by U. S. Department of Veterans Affairs.

·         Finally, the veteran would have to be otherwise qualified for homestead exemption.

 If you qualify for this exemption you will have to fill out the proper form and submit the proper documentation.

 

 

Back to Our Example
 

 

In our example we had determined that 37797 was our Gross Assessed Value.  The owner does not qualify or has not applied for any of the above described Exemptions, so the Net Assessed Value is the same as the Gross Assessed Value(37797).  Now that we know the Net Assessed Value is 37797 we next need to determine the tax rate. Lucky Guy lives in taxing district 206, the highest in Oklahoma County.  The tax rate in taxing district 206 is 129.92.  Tax rates or millage levies are set by procedures established in the Oklahoma Constitution or voted directly by the taxpayers.  A mill is one thousandths of a dollar.  For simplicity the Tax Rate is expressed as the amount you pay per $1,000.00 of Net Assessed Value. So to calculate in our example we take 37797(Net Assessed Value) and divide by 1000 which equals 37.797(you may have noticed that the result is the Net Assessed Value with the decimal moved three places to the left). Next you take 37.797(the number of 1,000′s in the Net Assessed Value) and multiply by 129.92(the Tax Rate for Taxing District 206) to get $4910.59 which is the amount of annual property taxes you will pay.

 

So to RECAP it looks like this: 

 

 

 

Taxable Market Value		$343,615.00
Gross Assessed	* .11(rounded)	$37797
Homestead Exemption(0)	-$1000.00 per	$37797
Additional Exemption(0)	-$1000.00 per	$37797
Find the number of 1000′s	Divide by 1000	37.797
Times the Tax Rate(129.92)	* 129.92(2 decimal)	$4,910.59
Annual Tax Amount		$4,910.59

 

 

So, to make sure we got it let’s do another example, this time with someone who is not being pillaged quite as much by the Taxman(cue the Beatles). They have a Senior Valuation Freeze that keeps their Taxable Market Value the same year after year, so even though these Homeowners have a home with a Market Value of $120,239.00 their Taxable Market Value is $114,400.00.  They have one $1,000.00 Homestead Exemption and their Tax Rate is a more reasonable 95.95. So let’s see what the calculations look like.

 

Taxable Market Value		$114,400.00
Gross Assessed	* .11(rounded)	$12584
Homestead Exemption(1)	-$1000.00 per	$11584
Additional Exemption(0)	-$1000.00 per	$11584
Find the number of 1000′s	Divide by 1000	11.584
Times the Tax Rate(95.95)	* 95.95(2 decimal)	$1,111.48
Annual Tax Amount		$1,111.48

 

So now you understand the calculations but you wonder how is that mysterious tax rate broken down.  Well in this particular case it looks like this:

 

City	Midwest City	7.29
School District	Crutcho # 74	48.18
Vo-Tech or Jr. College	Rose State College	17.30
County	Oklahoma County	23.18
Tax Rate		95.95

 

In our previous example a Tax Rate breakdown would like this:

 

City	Oklahoma City	14.97
School District	Deer Creek # 6	76.08
Vo-Tech or Jr. College	Francis Tuttle Tech # 21	15.69
County	Oklahoma County	23.18
Tax Rate		129.92

 

So now let’s look at how that actually breaks down in to dollars.  To calculate it we multiply 37.797 times the rate breakdown of each category to get the actual amount of money that is going to each entity.  An example is the first category is Oklahoma City so we take the city rate(14.97) from the chart above and multiply it by 37.797 to get $565.82(the actual dollar amount displayed below).

 

City	Oklahoma City	$565.82
School District	Deer Creek # 6	$2875.60
Vo-Tech or Jr. College	Francis Tuttle Tech # 21	$593.04
County	Oklahoma County	$876.13
Tax Amount		$4,910.59

 

So now one last thing.  Now that we know how to calculate how much taxes we are going to pay and where it is going, the only question left is How do we pay it?  Well most of us have a loan with the bank that requires us to deposit money into an escrow account that is then used to pay the taxes once a year when they come due.  So, the simple answer is you will pay it monthly.  So for the above amount of $4910.59 you would divide by 12 to get $409.22 which is the amount that Lucky Guy will pay with his monthly mortgage payment. 

Now you know how your taxes are calculated, where they go, and how you pay them.  Please let me know if this was helpful or if there is something I need to explain better.

Joel Garcia

Maybe. 

There is no doubt that if the government plan leaked Wednesday night becomes reality it would spur some home buying and reduce some of the inventory that is hanging out there. However, the question is, would it also cause some unintentional consequences in the long term or the short term for that matter.

I always get a little nervous when the government tries to save us.  I often compare government intervention to those wonder drugs that they advertise on TV.  They have super happy people doing happy things under a great tag line while they monotonously insignificantly read off the side effects that are often more harmful then the original problem.

I understand that we are now in un-chartered territory and the consequences for doing nothing could be egregious as evidenced in the slow as molasses recovery of the Japanese economy when the government acted slowly but (need a breath in the middle of this sentence gone wild) I still think it would be a worthwhile pursuit to try and understand as many of the unintended results as possible.

One immediate effect is that, knowing that a 4.5% interest rate is on the horizon, some buyers may choose to wait and see whether or not it happens.  I was speaking with a lender today who said that he was inundated with calls looking for a refinance at a 4.5% rate.  As I understand it the plan would likely not include refinances which would create a market of mortgages with two rates and an industry that would be trying to find a work around.  Even more troubling was that he said he received calls from buyers who were currently in contract to buy a house who wondered if they should breach the deal in order to wait for the 4.5% rate.

Longer term we may find people locked into their house because it has a lower rate, causing a firmly fixed inflexible real estate market.  Or, we may find that we have again artificially inflated prices causing us to move a little farther down the road, the inevitable paying of the piper.

I am not pretentious enough to believe that I am able to see the end result of these actions and I am sure there are people smarter than me attempting to understand the ramifications, but I would definitely urge them to attempt to be exhaustive in their consideration of the effects.

That all being said if you are out there planning on buying your first home I don’t think you can ask for much more.  You get a Tax Credit, Tax deduction, possibly bond money, a chance to buy a home at depressed prices, a buyers market, and now possibly a 4.5% interest rate.  Short of a fairy slipping the key to a home under your pillow while you sleep, I do not think you are going to get a better deal.

Hooray for 4.5%

Joel Garcia