Required Financial Disclaimers
By law, we are required to place the following disclaimer about like this one on our site:
The information contained in this website is for informational purposes only and is not legal advice, nor does it constitute an offer to lend. One South Realty is not licensed to offer legal advice nor is it licensed to act as a mortgage lender. We recommend you contract a mortgage lender directly to learn more about its mortgage products and your eligibility for such products
But we think that the bare minimum disclaimer doesn’t do the public justice. Furthermore, we want the public to better understand the process and thus, we spent considerable time breaking it all down in an attempt to simply what can be confusing legalese.
Below, you will find a full explanation of who we are and how we arrived at the numbers that we did.
One South Realty
So One South Realty is the creator of this site. We are a real estate brokerage in Richmond, VA and have been in business since 2008. The owners of the company have been licensed since the early 1990’s.
If you would like to do more research on our firm, our license is registered with the Department of Professional and Occupational Regulation. And any disciplinary action can be found be found here — http://www.dpor.virginia.gov/LicenseLookup/ — by entering in our license number #0226019977
Dodd Frank and the CFPB
In 2010, the Consumer Financial Protection Bureau was established with the signing of the The Dodd–Frank Wall Street Reform and Consumer Protection Act. The legislation grew from the financial and banking crisis that paralyzed the financial markets in the latter part of 2008.
Whenever anyone whose industry is covered under Dodd-Frank illustrates a financial model (i.e. mortgage payment or amortization schedule), they are required by law to disclose all of the underlying data, numbers and assumptions that were used to derive the analysis.
In order to a) be fully compliant with any and all regulations and b) to offer a realistic and fair analysis of the benefits of home ownership, we have created a highly detailed page for all visitors who wish to see how we arrived at the conclusions we did.
If you feel that any of these numbers are inaccurate or unrealistic, please let us know and we will be more than happy to re-compute scenarios according to your assumptions.
Here are the assumptions we used in building the financial model that we did.
- We used the CVRMLS and took the average sales price in 2013 and then again in 2017 in the City of Richmond to determine how much value had been gained or lost.
- We used a good faith estimate based on interest rate conditions at the time. A Good Faith Estimate and the type of mortgage used can be found below.
- We used the mortgage balance and interest rate to compute an amortizations schedule to see how much of the loan had been paid off.
- Below, you will find how we arrived at the value of the tax savings.
First, we are in no way asserting that the scenario we are modeling is any way guaranteed to occur in the future. We are simply demonstrating the AVERAGE SALES PRICES of homes located within the City of Richmond from January 2013 to December of 2018, per the Central Virginia Regional Multiple Listing Service.
Primary Year and Average Sale Price, City of Richmond
|Primary Year||Sale Price, Average, City of RIchmond|
Please note that the price that is paid for a specific house will affect the analysis, as will the condition of the property, any remodeling or renovations, deferred maintenance, and a host of other house specific factors. Furthermore, economic conditions can dramatically impact housing values and there is no guarantee that the next 5 years yield the same appreciation rates as the prior 5 years.
That said, here are two different examples of specific home that were bought in the latter half of 2012 and resold in 2017.
- 1216 Amherst Avenue | Bellevue — Purchased for $215,000 on 07/12/2012 and sold for $274,000 on 12/28/2017 (+$59k)
- 1001 W 47th Street | Forest Hills — Purchased for $260,500 on 07/09/2012 and sold for $315,000 on 09/13/2017 (+$54,500)
Second, we are in no way suggesting that all areas of the Richmond Metro will behave similarly. Each sub-market of the region has its own inputs and thus, any home’s value is likely to rise or fall differently.
Good Faith Estimate
For our analysis, we went back in time to 2013, and found a house that had sold in the City of Richmond for about the same price as the average home had during the year.
2108 Lakeview Avenue, Richmond VA, 23220, sold for $215,000 in January of 2013.
We assumed that the purchaser used an maximum FHA loan with a 3.5% down payment and received a 3% seller concession for closing costs, which we added to the sales price, making it a total purchase price of $221,450.
We used a 3.5% interest rate on a 30 year fixed rate mortgage, added in appropriate mortgage insurance premiums, as well as appropriate real estate tax and homeowner’s insurance expenses, and computed a payment of $1,333.73.
If you would like to see the entire estimate, you may do so here.
Source of Interest Rate Data
All interest rate information was pulled from the Federal Reserve data publicly available online via Federal Reserve Economic Data (FRED)
Our assumption for the analysis that the purchaser secured a 30 year fixed rate mortgage at a rate of 3.50%. According the FRED, the national average for 30 year mortgage rates in the week of January 3rd, 2013 was 3.34%, so we actually modeled 3.5% in order to be more conservative.
An amortization schedule is used by your lender to determine how much of you payment each month goes towards paying back your debt (also known as the principal payment) and how much goes to paying the interest on your debt.
Each payment that you make has a slightly different balance between interest paid and principal paid as you pay down your mortgage, an increasing amount goes towards the principal. When a mortgage is first established, the ratio of interest to principal is high, but inverts over time. In the last few years of a mortgage, a larger majority of the payment is going directly to principal reduction.
The amortization calculator below shows how, over time, a mortgage is paid off.
Our assumption is that a buyer would have made 60 payments in 5 years and paid the loan down from $213,699 to $191,681. That is a difference of $22,018.
Prior to change in the tax code beginning in 2018, the IRS treatment of mortgage interest was extremely favorable.
But under the changes to Federal Tax code beginning in 2018, mortgage interest will still be deductible, but the new higher ‘Standard Deduction’ somewhat minimizes the impact going forward. The higher standard deduction amount means that either higher interest amounts and/or other sizable itemized deductions would need to be present in an individual’s tax return in order to justify itemization of interest paid.
We strongly encourage you to talk with your tax advisor in order to model the likely impact that the mortgage interest paid in the purchase of a home would have on your individual tax scenario.
In the scenario we modeled above, $35.558.64 in interest would have been paid during the 5 years. Depending on the income you earned, other deductions you qualified for, and a host of other factors that determined your taxable income, your tax rate could vary substantially. However, for illustrative purposes only, we used a fairly typical marginal rate of 25% and the Commonwealth of Virginia’s current income tax rate of 5.75% (combined are 30.75%) to calculate the value of the MID.
$35.558.64 (MID) x 30.75% (combined income tax rate) = $10,934.28 (tax savings)
We are in no way representing that we are fully versed in income tax law and are not offering tax advice. Please consult your own tax advisor or visit the following websites to determine the value of the mortgage income deductions on your own tax situation.
- IRS — https://www.irs.gov/publications/p936/ar02.html
- Commonwealth of Virginia — https://www.tax.virginia.gov/income-tax-calculator