The Hidden Tax That's Keeping Homeowners Stuck (And Nobody's Talking About It)

Today I'm going to tell you about a tax law that hasn't changed since Bill Clinton was president. Back then, the average home sold for about $126,000. Today it's over $400,000. Yet the law is exactly the same. That one outdated rule may be keeping thousands of homeowners from moving, and ironically, it may be hurting today's buyers too. In today's Mortgage Minute, we will share all the details allowing you to make better decisions when buying and selling your home. So let's get started.

Well, good afternoon, everyone. Welcome to this week's Mortgage Minute. My name is Art Alvarez with MortgageWorks, where we have the answers and they're on the house. I hope you enjoyed that little intro from my, my twin brother, we'll call him, but wanted to give you a little bit of a hint as to what we're going to be talking today. Talking about today on, on the Mortgage Minute. Of course, you know, I'd like to touch on the sports world, and of course right now it's all about the World Cup. Uh, the U.S. Open, which I forgot to mention last week, finished. Wyndham Clark won that one. That was a good match— or a tournament, I should say. I will mention my lowly Angels seem to be scratching and clawing to getting a few more wins, so that's good. Of course, the Dodgers are well on their way to probably a third World Series, so we'll see how that plays out. But today, of course, the big news is the US and Turkey in the World Cup. I think the game is about 7 o'clock tonight our time, Pacific Standard Time, so be on the lookout for that. And who would have thought that with the World Cup and all the folks coming in overseas to watch the games that we could end up with a run on beer and ranch dressing? I still think that's pretty funny. But you know, I gotta tell you, I've never been that much of a soccer fan. I didn't play it as a kid. I kind of missed that generation as given how old I am. But, uh, I gotta tell you, you know, watching some of these games, I'm, I'm getting into it. So I think I've got the World Cup bug like a lot of folks have here in the U.S. that haven't paid attention to the soccer as much as maybe we should. So some pretty exciting stuff, and I have to say I'm looking forward to the game tonight. So, uh, let's root for the U.S. Uh, let's hope they can, uh, take another step further toward, uh, maybe going all the way. We'll see. So that we want to go ahead and give you the update on the stock and stock part. Well, the stock market and the bond market and mortgage rates. And Jeff likes to pull up our rate grid. And actually what's interesting about that is no change. Basically, uh, we're still in these same low 6 levels. All the media headlines keeps talking about 6.5, 6.6. Nope, MortgageWorks were more like 6.25. Uh, FHA and VA is still on the high 5s. So again, more of the same. Uh, sounds like a broken record, but you know, in that respect, it's a good thing, not a bad thing, that we haven't seen rates going, you know, significantly higher. And in fact, I think part of what's going on now is, of course, uh, oil prices have dropped quite a bit. We're now down to the low 70s. It was down— I think actually got under 70 yesterday, and I think today is still right around 70 to 72 range. So, and You may have not— maybe you've noticed, I sure have, gas prices have dropped. They are probably at least, I would say, 50, 60 cents a gallon, maybe a little bit more, better than they were just a few weeks ago. So that's going in the right direction, which of course is a, is a good thing to see. So let's look at the bond chart. The— this is a 5-day chart, goes back to last Friday, and that's the kind of move in the yield we like to see. And there's that, started late in the day on Wednesday, that Wednesday dip that Jeff likes to see. And it's interesting because You would think with some of the headlines lately that this wouldn't be happening. Of course, this is on the tail of last week when we had the Fed meeting, the FOMC meeting, where it was announced, uh, after the meeting on last Wednesday, week ago yesterday, that there was going to be no change in the Fed funds rate, uh, for the time being, and maybe not at all this year. And in fact, even a suggestion that we might have an increase in the Fed funds rate at least one time, a quarter percent. Before the end of the year is over. So you would think that that would not be good news for the bond market, it would help keep bond yields elevated, but yet here we go. You can see 4.396, that's pretty darn good. And, you know, we were approaching 4.50 just a week or two ago. So, so let's go ahead and get into a few of the data points so I can show you what may or may not be happening to cause some of these moves, uh, in the bond yields, uh, and the moves to the, to the to the benefit. Uh, first thing is, and it was a kind of a light week calendar-wise, uh, for data points. New home sales though did come out this week, and the forecast was 632,000, an increase over the previous month in April. Well, it turns out the number was disappointing. Uh, came out at 580,000, so a big drop from what was forecast and a big drop from last month. In fact, specifically about a 7.3% drop in new home sales. And when you dig getting into the details a little bit, um, essentially what the home builders are saying is despite cutting prices, despite lots of incentives being offered toward financing for these new home buyers, it hasn't been sufficient to move the inventory quite as much as they'd like. And so that can be seen obviously in the May numbers. One thing that's going to do is cause builders to slow down on adding to their inventory. Worst thing for home builders to have a bunch of standing inventory where they're paying costs related to construction financing and so forth. So what you're gonna see here is, you know, these kind of numbers persist and home builders are gonna back off on building as many homes before, you know, starting the new phase. Wanna get more contracts, sale contracts booked first before they start a new phase. And then when they start a new phase, probably a fewer number of units to try to kind of keep a, a handle on that inventory, uh, not growing too much. The big data point this week was the PCE, the Personal Consumption Expenditures Index. This is actually the Fed's favorite inflation gauge. And for this month, or I should say for the month of May, the forecast was, uh, 0.5%. April was 0.4%. And you can see there the core PCE May forecast was 0.3%, a slight uptick from April of 0.2%. And then what's interesting about this is that when you look at the headlines, because this, this data was released today. When you look at the head— headlines, uh, where the most prominent one I saw is, you know, PCE is at a 3-year high, you know, implying that rates are not going to fall anytime soon and in fact could be raised. Well, let me give you what the actual numbers turned out to be. Uh, the May forecast was 0.5. It came in at 0.4. It came in lower than forecast. In fact, it came in the same as the previous month, April. How about core PCE forecast to be 0.3% after 0.2% in April? Well, guess what? It came in at the forecasted 0.3%. So again, right on target as forecast. And then the core PCE year over year, because the 0.5 and 0.3 you see there, the first two bullet points, those are monthly figures. The core PCE— and again, core is excluding food and energy— and the May forecast, again, this is an annual number, 3.4% versus April of 3.3%. So again, up one tick, right as forecast. So when you look at this report, you know, it's hard to draw a conclusion that, oh my gosh, this is— inflation is getting worse. Well, yes, slightly worse, But as forecast— and again, remember that a big part of this number, as well as the CPI, the PPI, a lot of it is still related to oil prices. So all in all, these are actually, I thought, pretty good numbers, uh, for this particular data point release, despite the headline suggesting, uh-oh, more danger signs and inflation's getting worse. And you can make a conclusion, or draw the conclusion, that the bond market must be looking at this data the same way, because after all, the bond yields today, as you just saw in the chart we showed you, have improved the second part of this week, not gotten worse. So the bond market certainly has taken these, uh, actual release numbers in stride, and it did not reflect any sort of uptick in the bond yield that you otherwise might have expected if you only followed the headlines. So again, I can't, I can't stress that enough. And then my last item is personal income. That was the only other major data point that was, that was released this week. And interesting, it was forecast to be 0.4%., after a flat 0% increase in April. Well, guess what, folks? It actually came in at 0.7%. Again, that's a monthly number. So personal income did very well in May, well above forecast and well above what it was in April, 0.7%. Well, if you go back and look at those, uh, earlier numbers right above for the Personal Consumption Expenditures Index numbers, What is this telling you? Personal income is rising faster than the inflation rate. So that's called real income, uh, even after inflation, people are earning more. They're earning more than the inflation rate. That's a good thing. And so from that perspective, that's another sign the economy is actually doing pretty darn well. And so as a consequence, all the negative headlines about how bad the economy is, is a little bit of a head-scratcher because This is another example of where a data point kind of flies in the face of those headlines. The other thing that's not on our chart right there is the GDP. Uh, there was a revision, uh, released today for the first quarter, which was originally, uh, came out at 1.6% growth in the first quarter. Well, guess what? The GDP for the first quarter was revised to 2.1%. That's a half a percent higher. And you know what, when you get sales growth from quarter to quarter— not sales growth, it you know, economic growth, U.S. GDP growth from quarter to quarter. When it starts getting into the 2s, hopefully approaching 3s, that's very strong numbers. That bodes well for this economy, you know, humming along pretty well. People are making money, they're making more money than the inflation rate, so they have an increase in real purchasing power. So that's all good news that, you know, people should keep in mind. I'm going to leave you one other tip before we get into the main part of this discussion that we're going to do today. Is, you know, what is a— you know, I'm going to give you a rule of thumb, an easy way to sort of track mortgage rates, uh, you know, even without, you know, going to our website and checking our rate grid from day to day. Although I hope you will do that. We want you to go to our website and keep, keep posted on what— where rates are at. But, uh, here's a very easy rule of thumb to consider. There is a— there is something in the financial markets that is somewhat known as a mortgage spread. Now, what do I mean by that? Well, I talk all the time about your best barometer to track mortgage rates is the 10-year Treasury bond yield, and that is still the case. Now, that, that doesn't mean the 10-year bond yield directly affects what the mortgage rate's going to be, but it is your best benchmark. And there is a consistent spread between the 10-year bond yield and what the, uh, mortgage rate is going to be at any particular time. Now, here's the way to think about it. Now, a Treasury bond, a 10-year Treasury bond, has the full faith and credit of the U.S. government behind it, which is part of the reason the yield is as low as it is, as we showed you, showed you earlier, 4.39%. Well, what you may not know is that there is a, there is an average spread between the 10-year bond yield and what a conforming mortgage rate will be. And historically, that spread range— has ranged from about 1.7 to 1.9%. In other words, if you look at a 10-year bond yield on any given day, you could add 1.7 to 1.9 to that and get it and have a pretty good idea where a conforming 30-year fixed-rate mortgage rate is. So let's just use a round number, let's call it 2%. So if we're at 4.39% currently, as we showed you on our 10-year bond chart, If you add 2% to that, what is that result? 6.39. Well, guess what? That happens to be right around the current level of mortgage rates, conforming mortgage rates that you see in the financial pages and the headline news, and of course the weekly Freddie Mac release of the average yield that their, uh, loans are purchasing from lenders. No coincidence. Take 4.39 plus 2, uh, and you've got a pretty good idea where the mortgage rate is for a conforming conventional loan right now today. So keep that little rule of thumb in mind if taking a quick look at the 10-year bond yield, just add 2% of that to that and you'll have a pretty good handle on where a conventional conforming loan is. Now, that spread can change over time, uh, and sometimes it can get a lot worse and get way out of whack from this historical average spread of around 2%. And about 2.5, 3 years ago, remember when the, uh, Treasury yield was getting closer to 5% and the conforming 30-year fixed rates were in the high 7s and there was concern we were going to hit 8%? Well, why was that? Well, the spread at that time, around 2023, wasn't at 2%, it was more like 3%. And that was because an additional premium on that spread was required because inflation was much higher than— the inflation rate was much higher. And so there was more risk involved, uh, with that higher inflation numbers. And that's why that spread increased, uh, even though the 10-year bond yield hadn't gone up by 2%. But the spread from 2% to more like 3% was a big part of reason that we saw those conforming rates at that time get so high. Inflation has much gotten much more under control. That's helped, you know, minimize risk and has helped, you know, move that, that spread closer back to that 2%, you know, average norm that we've seen over the history of mortgage rates. So just keep that in mind as a little rule of thumb to, uh, use if you want to just, you know, check the 10-year bond yield real quick, and then like I said, add 2% to that and you'll have a pretty good handle on where conforming conventional is right now as of today. Okay, with that, we're going to go ahead and move into the main part of our conversation, and that's going to have to do with something that's been in the news lately. Um, and so this is something that Jeff and I want to talk about, and I wanted to bring it up because part of my activities involved with the Greater Palm Springs Realtors Association— I'm on the board of directors, I'm also president-elect of the association And part of what we do, both as an association and then at the state level with the California Association of Realtors, is we focus on topics that we want to be an advocate for in terms of, you know, changes in the, in the real estate world in terms of regulations, but also legislation and how that can affect the housing market. And, and, you know, basically hopefully affect homebuyers in a positive way. And so what's been on kind of getting on, you know, on the news page more, being talked about a lot more, particularly again at the California Association of Realtors and the National Association of Realtors, is, you know, whether or not it's time to take the current rules for home sale capital gain exclusion and do those need to be changed? Is it time for that to occur? So what am I talking about? And first of all, let me kind of give you a little bit of history. The Taxpayer Relief Act of 1997. Now, this was put into play to essentially try to simplify the rules from when someone sells their primary home and what kind of exposure to a tax on gain that they may be subjected to, if at all. Now, prior to this act, there was, you know, some rules in place are a little bit convoluted, a little bit difficult to track and understand. And so the intent here with this relief act was to kind of simplify the rule and make it something that's going to be a little bit simpler to understand. So what they did is they— the Congress replaced a complicated set of rollover rules with a very simple exclusion, as Jeff just pulled up here. And many of you homeowners probably are already aware of this, or if you're a prospective homeowner, this would be something you would want to be aware of if you're looking to buy a home. When you later on sell that home, if you're a single homeowner, you're not married, when you sell that home, you can have the first $250,000 of gain excluded from any capital gains tax. And then if you're a married couple, that is doubled to $500,000. And again, this is for the sale of a primary residence where you can have $250,000 up to $500,000 of your gain excluded from any tax when you sell the home. Now, that's obviously been a good benefit. It's been very helpful to homeowners to, number one, understand what those rules are so they know how much of their sales gains they can keep in their pocket, not have to share with Uncle Sam. But at the same time, there is some issues with this. And the— here, what is, what is that reason? What is the issue with this that maybe is calling into question whether or not it should be revised or maybe even eliminated? Well, as Jeff will pull up on the next bullet point, this has been in place for 30 years or nearly so, you know, in 1997 to now. We're talking 27 years this rule has been in place. So that is interesting because while initially this act had good intentions and was, I think, effective in addressing what, uh, was needed at the time, The question now is, is it still valid? Is it still appropriate given today's conditions? So again, as Jeff just pulled up on this next screen, why is it back in the spotlight? Well, let me give you a little bit of historical data. Uh, you know, back in 1997 when this act was put into place, any idea what the average or the median price of a home was back then? Well, you'd probably guess a lot lower than now, and you'd be right. How about $126,000? That was the median US home price in 1997 when this rule was put into place, the 250/500 rule. So you would think at the time those numbers at 250 and the 500 were not just picked out of the air, they were in some fashion selected as part of being reflective of the, you know, median home price at that time nearly 30 years ago. Now, what is the median price of a home now in the U.S.? Now we're talking national numbers, more like $404,000, triple, triple what it was in 1997. And yet this, you know, capital gains exclusion rule hasn't changed since then. The dollar amounts that were established in 1997 are still the dollar amounts that are in place today. So the reason this has now gotten Congress's attention is they're looking at it and discussing several ways that this could maybe be addressed. One would be to just increase the exclusion dollar amount, obviously increase it to some higher number. That's an obvious thing. But in doing that, then maybe consider a couple things that were not part of the initial plan in 1997. How about indexing it to inflation? Or how about indexing it to home prices? Either one would result in a, you know, current numbers that would be a lot higher than what we still have. Or here's another idea altogether. Why not eliminate or substantially reduce the tax altogether? Now, obviously, that would be really terrific if we can just eliminate the rule. And if you sell your primary home, all of your gain you get to keep and you don't have to share it with Uncle Sam at all. Wouldn't that be nice? Well, it would, but you know, I think we all need to be wise to the fact that the probable realities of that are probably not that great. So let's not hold our breath on that. So with that backdrop, then we can talk about what should they be if, okay. So let's give you a couple of examples. If the, you know, capital gain exclusion limits were adjusted for home price appreciation, okay, based on home price appreciation since that time in 1997. Well, the number of the, the dollar amount of exclusion for a single person jumps way up, more than 3 times, to $800,000. And then for a married couple, again, more than 3 times higher at $1.6 million. Uh, wouldn't that be terrific if you could have those kind of exclusion limits when you're looking to sell your home. Because you know what, and we'll touch on this in a minute, if you've got a 2 or 3% mortgage, that of course that's been holding you back. I think the other issue is, you know, this exclusion gain rule could be holding you back. Boy, wouldn't it be nice to be able to have these much higher numbers to protect your proceeds from being taxed? Now let's see what they look like if you adjusted for the inflation rate rather than home price appreciation. Uh, well, still pretty good. Single goes from $250,000 to $450,000. Married goes from $500,000 to $900,000. So again, either way you look at this, home price appreciation would be terrific. You'd have very, very substantial exclusions from gain on sale tax. But even if we only index to inflation, you'd still see a very nice increase both for the single person and the married couple when they sell their home. So What am I— what I'm getting at here is something that I wanted to bring to your attention. I think, again, homeowners probably are already aware of this issue, but if you're a home buyer, why it could matter for you in the future. Because what this data shows and why this has become something Congress is discussing is that, you know, as you know, for the last several years since the pandemic, we've been talking about the lock-in effect. Where homeowners are locked into their current home. And all the talk has been about because of their mortgage rate, because they've got a rate somewhere in the 2s to 3s. Well, certainly that's true, and that, that effect is real. That lock-in effect due to your rate certainly is real. But I would argue another lock-in effect that's as strong, maybe even stronger, is, as we put on this this slide, the tax lock-in. So really what's going on here is homeowners who aren't selling, even after they've owned their home for several years, they've seen a significant increase in their equity, particularly in the period from 2019 till now after we got through the pandemic. They're still feeling locked in. But what I would want you to understand is they're being locked in not just because of their interest rate, But because in a lot of cases the amount of equity they've achieved is now so great that too much of that equity would be exposed to a substantial tax hit because the capital gain exclusion rules are simply, didn't, are simply too low and did not keep up with either the standard rate of inflation since 1997 or the appreciation rate in homes since 1977. So because of that, we've got an artificially low threshold where you're going to get taxed on your proceeds. And any homeowner who's paying attention, talking to their accountant or their tax advisor, probably realized that. So that became another, you know, double whammy against why should we sell. We're going to give up our 2.5% mortgage, and my gosh, we may have, you know, several hundred thousand dollars of gain that we're going to get taxed on because of the fact that you know, we have these limits are too low. And of course, as Jeff pointed out, what is the amount of the capital gains? Well, it can vary 'cause, you know, you got both a federal issue in terms of capital gain and in some states a state issue. But, you know, generally I would say you would want to plan for at least like about a, you know, 15% hit in terms of a capital gains, you know, tax hit on your sale proceeds. You know, again, in the amount beyond those exclusion limits we already showed you. But as a usual disclaimer from me as a mortgage guy, a loan guy, is you definitely want to check with your tax advisor, be it a CPA or a tax attorney, and they'll— they can guide you as to what those capital gain rates are and what you're going to be exposed to when you sell your home. So I want to bring— I wanted to bring this to your attention because this gives you, I think, a fuller picture of the lock-in effect we've been dealing with now, where not enough homeowners are selling their home. And that's been an issue in terms of you know, homebuyers looking to buy. We don't have enough, you know, homes for sale. It's gotten better, but we still don't have enough homes for sale on the market for sale. And so that limited inventory, I think, is making buyers— giving buyers more challenges in terms of getting out and buying, even though in the short run there has been more of a shift to buyers having more leverage. But boy oh boy, if we could address this issue, particularly with the tax lock-in issue of getting those, uh, capital gains exclusion limits substantially raised, what I think you'll see is a whole bunch more homes hit the market, and that's going to give buyers more choices, uh, and of course give the existing sellers more competition. So maybe in the short run that could actually help prices, but eventually you get more homes on the market, you get more buyers jumping in to try to buy, I think eventually that's going to squeeze out into higher prices. So it's all about timing and how soon you get into the game and decide to, to go ahead and go for it. So keep an eye on this. It's my understanding is it's in Congress in a committee. The big concern with the politicians, as you might expect, is they always look at something like this as this is essentially in their minds potentially a tax cut. And of course, what does a politician do is they say, well, we have to find a way to pay for it. Well, that's interesting. So we're talking about proposal where people get to keep more of their money, but a politician says, well, uh, we're going to lose revenue, and so we have to, we have to get this change. If it happens, we have to find a way for it to pay for itself. Well, uh, this may be too complicated for most politicians, but, you know, in economics there's something about incentives and what happens when you create rules, policy rules that might affect people's incentives. Well, I would argue uh, any good economist could probably study this, and this is probably what needs to be done so that they can educate politicians about this, is that if we had that kind of increase in capital gains exclusion limits, um, I think that will prompt more homes to hit the market for sale. Uh, of course, a politician thinks, well, if we raise those limits and get less tax, then in a static fashion, the amount of tax revenue is going to drop. Well, they're going to think that because they're going to assume the amount of homes being put on the market isn't going to change as a result of the policy change. So in their mind, static— okay, we raise the limits, less tax, we're going to get less revenue, uh, we're not paying for the change. Well, what they're missing is when you increase those limits, people get to keep more of their sale proceeds. More of their sale proceeds— more of those folks, I think, are going to sell even if they have a 2 to 3% rate mortgage because they're going to realize how much more money they can capture and keep in their pocket. And so my argument would be, and I think this could be borne out with some good research, you'll probably see an increase in the number of home sales that would more than make up for the loss of tax revenue on each individual sale. So that, yeah, there'd be less tax revenue per home sale, but there'll be more total tax revenue because more homes will get sold. Of course, that's even before talking about the— all the ancillary effects. You're getting more homes sold, more realtors are getting commissions, you're You got more support services involved with those sales, appraisers and credit report companies and home inspectors and all the, the trades that might be doing repairs on these homes, etc., etc. All that, of course, trickles down into all those folks got to get paid. That means more tax revenue and so forth and so on. So there are some real good economic benefits to making this change, and so that's why I wanted to make sure that you were aware of it. And, you know, if you're active, talk to your, your your local congresspeople and let them know you think this is a good idea and urge them to do this, because I think it's a— it would be a big shot in the arm to address our housing problem and give more and more people housing opportunity. And yes, as Jeff just put up there, this definitely could be a very much a win-win proposition for all, and I really wanted to, you know, see this happen. Now, with all that said, I want to finish up here and talk about, okay, Let's assume these capital gains exclusion limits get raised considerably. So if that were to happen, what do you do as a prospective home buyer? Well, in this first panel that Jeff just pulled up, I want you to think beyond the interest rate. You have to consider that, you know, it's, you know, folks will talk about when you buy a car, it's all about the payment. Well, yeah, Uh, when you buy a home, of course, there's this obsession with the rate, and the rate has become the bad guy in terms of that's the reason people aren't buying is because rates are too high, because we haven't gotten out of our heads that artificial period during the pandemic when rates were at levels never seen before and will not see again in our lifetimes. So what I want you to realize is that when it comes to buying a home, you got to think beyond just the rate. You've got to think in terms of you've really got 3 issues that you should be focusing on, and they could be part of your negotiation. There's the price, there's the financing, and then how much do you need for cash to close? And that's of course down payment and closing costs. So really what you want to think about is a start— a smart strategy has got to incorporate all three of these aspects of the transaction, not just focused on the rate. So that's point number one. Now, point number 2 is one option to consider. And what you would do here is use your purchase price for a seller-paid buydown. Now, obviously not news. I've been talking about this forever. Some of you are going, oh my gosh, here comes Art again with the buydowns, buydowns are the bomb, and he's going to give us yet another example of why this is a good strategy. But, you know, the point I would want to make is buydowns still are an integral part of getting homes sold and helping buyers get convinced to buy a home. Again, had another case here in the past week to 10 days, another situation, you know, a realtor contacts me for a prequal. I talked to the borrower who's going to buy. She tells me they're going to make an offer price below list price of a certain dollar amount. I said, fine, duly noted, I'll issue your preapproval based on that. But would you mind me giving you another idea? And so what I did is, as usual, I said, look, why don't you not ask for a lower price, offer full price, ask for that dollar amount that you would have gotten with the lower price, ask it, ask for it as a seller credit. In this case, it was $30,000. The price of the home was $575,000. She liked it. We ended up doing the preapproval based on that structure, and we used the $30,000 for a 3-2-1 buydown. Uh, so she's gonna have a first-year rate at 3.25%, and she's also going to have all of her closing costs paid. So there you go. Here's an example of how if we get those exclusion limits raised, we get more homes on the market. You're a prospective home buyer, okay, you've got some stuff to choose from, a lot more homes to choose from, but you're still concerned about the financing aspect and affordability. Option 1 is use the price for seller-paid buydown. Now I want to add something to this. In all the discussions we've had on this show for a long time, we always talk about, you know, offer list price and then get a cash credit, or maybe offer a little bit below list price and maybe get a cash credit. What do you do if a seller's just not going to budge? They don't want to— they don't want to offer anything. They don't want to take a lower price. They don't want to offer a seller credit out of their proceeds. They want their price and they're sticking to it. Well, let's assume you end up deciding you like the home so much you still want to buy it, but you still want to get a chance at doing something with the loan, but with the buydown— buying down of the rate. Understand, and I've been involved in a few of these, think of it this way: in your offer price, offer a price where you are essentially financing your temporary buydown through the seller's money but you're doing it by offering above the list price. In that case of $575,000, you could offer $605,000, still ask for $30,000. So you're still netting the seller that $575,000 net that they are adamant they want, but you like the home so much you're willing to do that. So offer $605,000, still ask for the $30,000, uh, and then that way we can still do the 3-2-1 buydown. Now, what's the watch out for? Yeah, appraisal. What if the appraisal comes in low? Yes, that's a risk. So you do have to be careful about this strategy. Talk to your agent about it in, uh, in detail. Talk to us and we can help you evaluate whether or not that's going to be a risk. But what a point I want to make is that is another option. So essentially you're financing, uh, your desire to get a 3-2-1 buydown and getting your closing costs covered You're financing that through a premium on your offer price. That is okay. Again, just be mindful of appraisal issues and making sure you think that that home will appraise. But that is a viable option. I've been involved with transactions like that, and it really does work. Now, the next option, number 3, that Jeff just pulled up is, you know, using lender credits to reduce your cash needed to close. Now, what does that mean? Well, from time to time, I'll get somebody who'll say, look, I'm trying to reduce my cash, uh, outlay, both down payment and closing costs. And maybe we're in a situation where a seller's just not willing to, to offer anything as a credit to cover closing costs, and maybe the buyer's, you know, squeamish about offering above list price in order to get that credit to cover their closing costs. Is there any other option? Oftentimes I'll have a borrower say, hey, can I finance my closing costs into my loan amount? Well, the short answer is no, you can't do that. You can't, you know, borrow, you know, $400,000 on a $500,000 property, and if you got $10,000 in closing costs, uh, you make your loan amount $410,000. Well, you can make your loan amount $410,000, but there's all kinds of issues with that. You're going to be less than 20% down, you're going to trigger PMI expense, and so forth. So from a practical reality standpoint, financing your closing costs into your loan amount is not a workable solution. But what is? You can finance your closing costs into the rate. This is what number 3, the option 2, is: using a lender credit to reduce your cash needed to close. What that means is if you, you can check with any lender and check with us and we'll tell you probably what's the market rate today for conforming conventional loan. And I would tell you today it's 6.25%. Well, let's say you're buying a home, you're putting a minimal down and you're really scraping. You would like to get your closing costs covered. Seller isn't willing to help you. Do Do you have another option? Yeah. What you would do is take that rate, 6.25%, and raise it. Now we have to determine your debt ratio is still going to be okay, but let's assume you've got good income and that's not going to be an issue. Raise the rate that you select so that instead of getting 6.25% at zero points, get 6.75%, half percent higher. And then guess what that means? You'll probably get a net lender credit that could be as much as 2.5% or 3%. Of your loan amount. And that is a lender credit from the lender, cash dollars that you can then use to pay your closing costs. So then what you can do, and when you look at these two options, Option 1 and Option 2, what I'm suggesting is we can either, you know, we got a variety of ways we can attack this. Get a seller credit either off a full list price, or even a premium over full list price so that the seller still nets their list price, get that credit, and we can use that to buy down your rate either permanently or temporarily, uh, and have money left over quite often to cover all or most of your closing costs. Or a combination where we get enough credit where you can cover the buydown piece, but then take a note rate that you're going to buy down from and select a higher-than-market note rate. So you're creating a lender credit that will still help you pay your your closing costs, so that, that way you're still addressing both your need to get a lower rate, uh, starting off for 2 to 3 years if it's a temporary, or permanently if you go for a permanent buydown, and then still have most if not all your closing costs covered. So that's the point I wanted to make, is that you can sometimes offer above list price to get your credit. That can work, subject to appraisal. Or you can take a premium rate to cover your closing costs and then ask for lesser seller credit to cover just the buy-down portion. What we're here to do for you is help you with these different options and put them, you know, on paper in a concise way, easy to understand way, so then I can walk you through it. So again, these are the two options. And so I want to finish up here by— okay, so what does this mean? Well, the bigger picture here is what this is all about. It's about your goals, and it's about understanding what is it you're trying to achieve. You're trying to achieve lowest monthly payment. You're trying to achieve the least amount of money out of pocket. You're trying to lower your overall long-term borrowing costs. And of course, you're trying to preserve maybe some of your liquid assets as savings. That can be what we call the post-closing reserves. And it's quite all right for you to want to focus on all four of these goals and use a strategy like I'm describing to essentially achieve all of these goals without just this sort of tunnel vision focus on the rate quote and at the exclusion of all else. That's where you have to really take a look at that, at this in a broader picture, and understand that all of these issues are at play. And we can help you prioritize those, those goals, what you're trying to achieve in the most effective financial way for you that's going to work for you long term. So with that, I want to go ahead and finish up. What's the bottom line here? You have more options. We've got seller-paid buydowns, we've got temporary buydowns. Yes, those are typically paid by the seller. Uh, if you can't get a seller credit that can also cover your closing costs, we can show you how lender credits through a premium rate can get your closing costs covered. And so as a consequence of all these, uh, we're going to give you a smart loan restructuring, and that way you can move forward without sacrificing affordability. So again, keep all of these in mind, all 6 of these bullet points. I can help you with all of these issues and help prioritize all this. So here's the thing I want to leave you with, and we're going to conclude the show with this. And this is the question every homeowner should ask before not moving: if I could structure the financing so that my monthly payment is lower than I expected and my cash required at closing is lower than I expected, would moving suddenly become possible? I would argue yes. And I'm basically proving this every day when I get requests for pre-qualifications from agents and their buyers. Uh, this is the kind of detail, the kind of issues that we get into deep discussion with our borrower prospects. And what I'm finding is that in most cases, I'm able to successfully convince them to let me show them how I can address all of these goals in an effective and compelling way so that they're going to feel good about pursuing that home purchase and getting themselves into escrow. So that's the point. Strategy creates opportunity. And remember what I said, when opportunity presents itself, it's too late to prepare. So keep all of these points that I've just made in mind. If you're looking to buy, you're still on the fence, I would argue it's time, especially as we go into the summer when you have less competition anyway. Summer out here in the Coachella Valley, a great time to purchase. You got more leverage, you got more negotiating power. So put all this— these into your think tank here, and I'll help you and help you structure something that's going to help you focus on the affordability issues so you feel good about buying. So again, as Jeff just put up there, schedule a call with me. Give me a call, send me a text on my cell phone. Send me an email. So again, there it is. If Congress raised the capital gain exclusion to $800,000 for individuals, $1.6 million for married couples, or if they eliminated it entirely, which would really be good, would that make you more likely to sell your home? Let us know that. We'd like to get this sort of impromptu survey. Let us know what you think of that, of that question, and give us your answer, and then we can share it with you on a future episode. Okay, so with that, I'm going to conclude this week's Mortgage Minute. I want to watch, uh, thank you for watching and listening to this week's Mortgage Minute. My name is Art Alvarez with MortgageWorks, where we have the answers and they're on the house. Enjoy your weekend. Uh, be sure to check out that US versus Turkey World Cup game. Let's go and cheer on the US team and see if they can go all the way. So with that, have a good weekend. So long, take care.