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The Fiscal Cliff, Mortgages and Mortgage Rates: How it all Relates

By Gretchen Wegrich Updated on 7/18/2013

The Fiscal cliff, mortgages, and the mortgage ratesWhen Congress met to discuss the fiscal cliff bill, it was voted upon and decided that the Mortgage Forgiveness Debt Relief Act would be extended through the end of 2013.  This particular fiscal cliff vote will drastically increase and spike a national housing recovery.   

What does the Mortgage Forgiveness Debt Relief Act do?

The Mortgage Forgiveness Debt Relief Act (part of the fiscal cliff bill) waives mortgage debt forgiveness from being considered taxable income by the IRS.  This mainly applies to lender-approved transactions that are less than the principal mortgage balance as well as short sales.  For example, if a homeowner owes $250,000 on a mortgage and short sells for $150,000 would be taxed on the $100,000 difference as income; they would subsequently be placed in a higher tax bracket.  Also, due to the fiscal cliff, mortgage interest deduction will be retroactively covered for 2012 (and will be extended through 2013) for filers who made below $110,000.

Here are some other notable facets of the Mortgage Forgiveness Debt Relief Act:

·         The maximum amount of qualified principal mortgage debt is $2 million (or $1 million if you are married and filing separately) and second mortgages are eligible as a result of this fiscal cliff deal.

·         The 10% tax credit for homeowners to be used for home energy improvements was made retroactive to cover 2012 and will be extended through 2013.

·         For qualified leasehold improvements on properties, 15 year straight-line cost recovery will be covered retroactively through 2012 and will be extended through 2013.

How does the fiscal cliff affect mortgage rates?

After Congress voted upon a bill to improve the fiscal cliff, mortgage rates increased to their highest levels since the 19th of December.  The reason?  Multiple markets reacted to the occurrence of the fiscal cliff bill by raising bond yields and stock prices.  This gave mortgage rates a reason to rise within the first few hours of trading, but since then, mortgage rates have been able to hold in a steady manner.

Due to the fiscal cliff, mortgage rates have been moving to the higher end of the recent range activity.  These mortgage rates that we have been seeing have emulated the rates of late October as well as the rates during the week beginning with the 18th of December.  Closing costs have varied, but mortgage rates have seemed to move in the direction of positive 0.25% due to the recent passing of the fiscal cliff bill.  Due to rate market resilience, it’s unlikely that rates will rapidly increase but will more likely do so over time.

For today's current mortgage rates, please click here.

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About The Author:
Gretchen Wegrich
Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.

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