Why Buying A Home In Todayâ€™s Market Is A Complete
Written by Cheryl Kilvington, Prodigy Real Estate, 651-771-6328, Dated 3/22/2010
Cheryl Kilvington is certified as a
“I help you understand the tax advantages financing alternatives & investment aspects of home ownership, and why NOW is an incredible time to buy.”
Cheryl Kilvington has been a Realtor in the Twin cities since 1995. She successfully uses home staging and Feng Shui in her real estate practice. Cheryl is certified as an e-PRO specialist using Internet marketing and as a Residential Finance Consultant.
Cheryl Kilvington—Prodigy Real Estate Group—651-771-6328 Email Me At: Cheryl@HappyHomeHunting.com 2
Good for you! You are in the right place at the right time. Not very often does a set of circumstances come along that opens the door to an unusual opportunity never seen before and likely never to be seen again. Such a
“perfect storm” of circumstances has aligned itself in today’s housing market.
The window of opportunity is very short—those who act before April 30th, 2010 will reap unheard-of rewards, though there will still be lesser opportunities in the housing market throughout the whole year. What are the elements of this Perfect Storm that make now such an unbelievably great time to buy? Well, for starters . . .
The selection is tremendous.
There is a lot of great housing inventory out there to choose from.
True home values are above current prices. Great deals are to be had.
Interest rates are incredibly low.
In fact, lower than they were during the Eisenhower administration.
Tax incentives available only to home owners.
In addition to the “regular” home owner tax incentives that allow you to deduct both mortgage interest and property taxes off of your income tax . . . 3
. . . the Federal Government will pay a first time home buyer a tax credit up to $8,000 if you write a purchase agreement by April 30th of 2010 and close by June 30th. (Repeat homebuyers receive a tax credit of $6500.)
People . . . this is huge! How is a Tax Credit different than a Tax Deduction?
Reduces income subject to Tax
Dollar for Dollar Reduction in Tax Liability
Deduction Tax Bracket Tax Savings
$8000 X .28 $2240
Tax Credit Tax Savings
If you are in a 28% tax bracket, a Tax Credit of $8000 actually shelters over $28,000 of income from taxes! If you are a First Time Home Buyer who hasn’t ever experienced the tax advantages of home ownership, this amazing “tax credit” factoid may have completely flown right over your head! 4
But don’t worry . . . as you read on, I’m going to show you, slowly and methodically, why, in most cases, buying a home right now during this Perfect Storm, will be cheaper for you than renting. Besides the regular tax incentives, and the soon-to-expire tax credit, home owners who sell their home any time after 24 months of ownership may exclude up to
$500,000 (for couples) or $250,000 (individuals) of profit from taxes of any kind! No other financial investment allows the average American to shelter income in this way!
But, don’t assume I’m right about all of this without some graphic illustrations to prove the facts.
Let’s say you’ve been renting for several years. Your current rent is $850 per month, and you’re thinking about buying a home for $150,000. You wonder if you can afford it. Maybe you’ll end up paying a lot more to own a home than you do now to rent. You worry that homes will not appreciate at all for the next few years. Will it really work out to your benefit, or should you just keep on renting? 5
Using my specialized “Rent Vs. Own” Residential Finance calculator, I can plug in our numbers to see if buying this $150,000 home will make more financial sense than continuing to rent for $850 per month. I’ll use 0% as our annual appreciation, in case home values don’t start to rise any time soon. We’ll plug in a 3.5% down payment, which is required for a standard FHA loan, and use today’s interest rate of 5.0% for a 30 year fixed term. Notice these numbers have all been plugged in down the left side of the calculator.
On the right side of the page, you’ll find our results. Our mortgage amount is $144,750. The principal and interest (P & I) each month amounts to $777.05. Monthly property tax and home owners insurance (T & I) adds $218.75. Our total monthly house payment (PITI) equals $995.80. Gosh, that’s more than the $850 in rent you’re paying now, right?
Oops . . . wait a minute; read on! Here’s where it gets good! 6
3 We’ll add monthly maintenance expenditures back in to the monthly payment.
Remember, you get to deduct your property taxes and mortgage interest off your Income Tax bill. So we can subtract that savings from your monthly payment.
Then, we subtract the amount of principal reduction that’s happening each month you pay your monthly PITI payment. That’s money you would have just lost to rent, but it’s now adding equity to your home.
Notice that . . .
Our newly revised monthly payment, after all tax savings, zero appreciation, and adding in monthly maintenance expenditures amounts to:
$787.87 for this:
rather than $850 for this:
Monthly Savings =$62.13 Annual Savings =$745.60 “But,” you may say, “I need that extra money each month; I can’t wait until I do my taxes at the end of the year.” In that case, you can simply change your exemptions on your W-4, so that less money is withheld from your paycheck each month. Your income tax refund will be lower at the end of the year, but you’ll have more take-home pay each month. 7
So Back to that First-time Home Buyer’s Tax Credit . . . Here are the rules:
Buyer & spouse may not have owned a Principal Residence in the previous 3 years Closing dates must occur between January 1, 2009 and June 30, 2010 Purchase Agreement offered and accepted by April 30, 2010 Maximum of $8,000 refundable tax credit Income restriction - $150,000 married couples; $75,000 for singles (for full credit) Must be used as principal residence for three years
Remember: The effect of the tax credit is a dollar for dollar reduction in the buyer’s tax liability compared to a tax deduction which reduces their income subject to tax. An $8,000 tax credit shelters $28,000 of income to a taxpayer in the 28% tax bracket. What about repeat buyers? Here are the rules:
Buyer & spouse must have owned and lived in current home for five of the past eight years. Closing dates must occur between November 6, 2009 and June 30, 2010 Purchase Agreement offered and accepted by April 30, 2010 Maximum of $6,500 refundable tax credit Income restriction - $225,000 married couples; $125,000 for singles (for full tax credit) Must be used as principal residence for three years 8
Unfortunately for most of us . . . . . . we tend to have a herd mentality. We follow the herd and feel most comfortable jumping into something new when we notice others enthusiastically doing it.
Therefore, most people tend to react to the real estate market based on what everyone else is doing. They buy at the top of the market, such as in 2005, when there was the lowest chance for opportunity and the highest degree of risk. A visionary buys at or near the bottom of the market, such as now in 2010, when there is a higher opportunity for an increase in value with lower risk of loss. (Warren Buffet would be so proud . . .)
Real Estate Market Cycle 2005
Low Risk High Opportunity 2006
Low Opportunity High Risk
Hope Depression 2009
We canâ€™t tell when the market has hit bottom until it has already started to rise. Then we can look back and see it. 9
But, even with all this good news, you may be saying to yourself: “I’ll bet I could make a better investment in the stock market, or in CD’s. After all, who knows when houses will start appreciating in value again?”
I’m so glad you asked that question! I actually have a “Your Best Investment” Calculator to test out this question. Let’s use the same $150,000 house for sale as in our last example. Just to prove that there really are houses in the Twin Cities in this price range, I pulled up a few on the MLS on Friday, March 26, 2010, to show you. None of these houses are bank owned, in foreclosure, or potential short sales.
Col. Heights—$145,000 Vad. Heights—$131,900
S. St. Paul—$154,900
Your 3.5% down payment on a $150,000 home is $5,250. We will compare your home purchase down payment with taking that same sum of money and investing it into a CD or the stock market. We’ll look at your investment over a five year period, and see which investment gives you the best financial return. 10
Because we want to compare the home purchase with the return on a CD or the stock market, I went into www.bankrate.com to get today’s best rates.
The best 5 year CD interest rate I could find for today is 3.28%. We will use that to compare with the return on home purchase.
The stock market is a little harder to predict our return. A little research produced experts who predicted a 5 year investment, watched carefully and moved when necessary, should “likely” produce a 4-8% return. I’ll average that and give us a 6% return. Our $150,000 house purchase will yield, for the purpose of our example, a 0% return. I actually believe, over the next five years, houses will appreciate better than that, but I want to make a point, that even if they don’t, they are still an excellent investment, as compared to CD’s and stocks. So, this calculator to the right compares the future value of the amount of money necessary for the down payment on a home using three possible alternatives: a certificate of deposit, a stock investment, and purchasing the home. 11
Now let’s run our calculation on our three investments:
Notice in our Results on the right side of the graphic above, that the calculator states “Home is the Best Investment.” We see that the same amount of money, $5250, was invested in all three investment vehicles: CD Stock Market Home
- increased to $6,169 after 5 years - increased to $7,026 after 5 years - increased to $17,078 after 5 years
How can that be, when we calculated that homes will appreciate zero percent in the next five years? Even though there was no appreciation on the home, the principal reduction achieved by paying house payments increased the owner’s equity by about 27% per year over that five year period. Since a similar amount of money would have been paid in rent, and this amount would have increased your landlord’s investment but not your own, this is a valid way to look at your financial return. Note: The last line in the results column shows how our investment profits are taxed. CD’s are taxed as ordinary income according to your tax bracket, and stocks are taxed as long term capital gains (most commonly 15%).
The home is excluded from tax because it is your principal residence. Cool, huh? 12
When you work with a Residential Financial Consultant like me to purchase your home, you will have access to lots of cool buying strategies that the typical real estate agent is not aware of. One quick idea I’d like to share with you is the
2-1 Buy Down Comparison Let’s say you’re about to write a purchase agreement on that $150,000 house we’ve been discussing. You’d like to ask the seller to accept a lower offer—let’s say a 2% reduction, or about $3000 off the asking price. Instead, I’d like you to consider the advantages of negotiating a 2-1 Buy Down Comparison with the seller. Note: This is not an ARM or Adjustable Rate Mortgage. It is a 30 year Fixed Rate Mortgage.
Instead of convincing the seller to lower the price, we negotiate with them to spend roughly the same amount of money, $3,033, to buy down your mortgage interest rate for the first two years of your mortgage. Instead of a lower monthly payment of $761.34 for the 30 year life of the loan, notice the break you’ll be getting on your monthly payment during Year 1 and Year 2, when, as a brand new home owner, you may want some extra money to buy window treatments, paint or buy furniture. Your 1st year, you’ll be paying only 3% interest, or $166.78 less per month than during years 3-30. The 2nd year, you’ll be paying only 4% interest, or $85.99 less per month.
Years 3-30, you’ll pay 5% interest.
As you can see, the 2—1 Buy Down Comparison is a neat tool that can help you structure your finances to your advantage during the early years of your mortgage loan. In addition, I can show you the
3-2-1 Buy Down Comparison, 80-10-10 Comparison Equity Accelerator How Interest Affects The Price Cost of Waiting To Buy
These are all Financial Calculators that assist me in putting together the best possible financing package for you, making your home purchase more affordable, and yielding returns on your investment to your highest advantage.
Let’s get started . . . Now that you know what a complete No-Brainer it is to purchase a home before April 30th, let’s you and I sit down for coffee and a consultation, and see if this makes sense for you. It may . . . or it may not. But at least you’ll be making your decision with all the facts. Don’t let this once in a lifetime opportunity pass you by. Call Cheryl Kilvington 651-771-6328 or email: Cheryl@HappyHomeHunting.com 14