Thursday, April 13, 2017

Even W Proposed $15k MID Limit New Excel Tool W Graphs Shows Substantial Benefits of Home Ownership.

The current efforts to reform the Oregon mortgage interest deduction (MID) have often focused on how much home buyers might lose if the MID was limited to $15,000. 

A new Excel tool I constructed offers a comprehensive view of the financial benefits of homeownership and demonstrates, with 3 graphs, that the proposed Oregon $15,000 limit on mortgage interest deductibility on state income tax returns: 

  1. Would have a tiny impact in comparison to the full range of financial benefits that homeowners get (and that are not available to ANY renter).
  2. Would keep in place substantial state MID subsidies and 100% of state property tax deductions/subsidies and 100% of federal MID and property tax deductions/subsidies.

[Because the Excel workbook is copy protected, I can't embed it in this post, but you can download it HERE. While you may be able to view the workbook in your browser I recommend downloading and using in Excel for full functionality ].

The workbook estimates ALL homeownership financial benefits: MID subsidies at both the state and federal level, accrued equity as loan principal is reduced yearly, additional equity accrued through home price appreciation, and savings from state and federal property tax income tax deductions.

There are eight variables that you may choose to enter/change at the top of the worksheet. The inputs populate the table in the worksheet AND three graphs to the bottom and to the right of the data entry section. 

  • Graph 1 shows for the first year how much the MONTHLY benefit is for each component and the total combined benefit
  • Graph 2 shows, for the first ten years, the MONTHLY total benefit vs any loss of MID because of the proposed $15k MID limit. 
  • Graph 1 shows the cumulative total benefit vs any loss of MID benefit because of the proposed $15k annual MID limit, and provides a comparison to the down payment. 

These are the default entries in the workbook. (They are all variable except the property insurance rate):
  • Borrowers are a married couple with income of $99,950. This is 170% of the 2016 2 person Portland metro HUD median family income of $58,640.
  • The home is located in Multnomah County (Average property tax rates vary by county and are based on 2015-2016 Oregon Department of Revenue data).
  • The home has a sales price of $381,147, which is affordable to the homebuyer with this income, using a 30% of income underwriting ratio (see "Affordability" below for more discussion about underwriting ratios)  That sales price is $31,000+ MORE than the Feb 2017 RMLS reported Portland metro median sales price of $350,000.
  • Loan has a 5% down payment, 
  • 4.5% interest rate 30 year loan. This rate is 1.25 % higher than the Oregon Bond home loan program rate of 3.25% for first time home buyers.
  • 9% state income tax rate, 
  • 20% federal income tax rate. [A conservative estimate, 2017 taxable income brackets are HERE]. 
  • And a conservative annual home price appreciation of 2%. (The average Oregon home price index annual increase from 2017-2026 in the latest Oregon Economic forecast is much higher at 4.6%)
  • A .0025% insurance rate. [Standard for all scenarios].
  • Inflation of the proposed $15k MID limit by the average annual CPI of 2.6% found in the Oregon Economic Forecast for 2017-2026.

With default entries the results, including 3 graphs, are in PDF HERE and embedded below:

FIRST YEAR Benefits: Graph 1
The MONTHLY average benefits (WITH the $15,000 State MID limit).: 
$1,606 Total
  • $488 equity increase because of principal reduction.
  • $637 home price appreciation.
  • $338 in continuing federal income tax subsidies+
  • $144 in continuing state income tax subsidies=
  • $481 a month in continuing state and federal income tax subsidies.

The average monthly loss of state MID is $9. (Because MI was greater than $15,000)

The federal MID will fully remain, and write off of property taxes without limits will remain for both state and federal income taxes. 

Average MONTHLY Total Benefits for Each of the First Ten Years: Graph 2

  • The second graph, covering the first 10 years, shows that average MONTHLY average for the total benefits, vs the MONTHLY total average of MID lost (if any). 
  • With the default entries, the total MONTHLY average benefit GROW every year, while the MONTHLY average MID loss (if any) DECLINES each year. In year 1 the MONTHLY total benefits are $1,606, but in year 10 they grow to $1,934; 
  • MID loss because of the $15k limit (inflated ) averages $9 a MONTH in year 1, but drops to $4 a month in year 2 and ZERO in year3.

Average CUMULATIVE Benefits for Each of the First Ten Years: Graph 3. 
  • The 3rd graph, covering the first 10 years, shows that cumulative benefits grow from $19,273 at the end of the first year to $211,884 at the end of year 10. 
  • NOTE that with the default entries the first year financial benefits EXCEED the 5% down payment of $19,107 (The down payment amount is also shown on this graph).
  • The MID loss in the first year totals $110, and the total MID loss is only $50 more in year 2 ($160 total) AND there is NO further loss after year 2. (Interest declines each year as a greater share of the monthly payment goes toward principal and the initial $15k MID limit increases as it is adjusted to inflation).

Any owner with more than $15,000 in eligible home interest (inflation adjusted) will continue to get $113 a month in state MID subsidy if their state income tax rate is 9%, and more if they state income tax rate is higher.

The federal MID will fully remain, and write off of property taxes without limits will remain for both state and federal income taxes. 

In addition to showing the financial benefits of home ownership completion of the inputs for the 8 data entry cells (shaded in grey) will produce an estimate of the income required to buy the home with the inputs made. Because these assumptions vary from reality for each property, borrower, and lender the affordability level shown should be viewed ONLY as an estimate.  

The worksheet uses inputs of principal and interest, interest rates, property tax, insurance costs, mortgage insurance estimates AND the underwriting ratio [share of income assumed to be available to pay housing costs).   

The default underwriting ratio used is 30% of income (the same share of income that renters are expected to pay for housing). "Qualified mortgage" under CFPB rules however allow families to qualify for a loan if their total reoccurring debt does not exceed 43% of their gross income. 

This means that income based affordability determinations can span a wide range of loan values, depending on the specific financial details of each transaction. (including credit scores, reoccurring financial obligations, mortgage insurance rates, AND the down payment percentage). 

To illustrate the wide range of potential qualifying incomes, using the default data, here are qualifying incomes at different underwriting ratios to a Multnomah county home with a sales price of $382,147 and loan of $363,040:

30% of income (my default entry):  $99,950                         
36% of income (DTI max ratio for Fannie/Freddie :$83,292
43% of income (CFPB qualifying loan max DTI ratio): $69,733        
[Given the wide range of potential qualifying incomes for the default loan there is no graph associated with the affordability estimate]. 

Excel Notes:
In addition to changing the values in the 8 variable cells, use of the "Goal Seek" function in Excel allows a wide range of customization of results. For example you can use goal seek and change either of the two qualifying income cells to a specific value by having the goal seek function change the purchase price. 

The table of data below the first graph is copy protected and outside the designated print area for that sheet.

However, you can copy and paste the values [not formulas] from that worksheet into another worksheet and then format and print that table.

Originally created and posted on the Oregon Housing Blog

No comments:

Post a Comment