The Consequences Of Holding Out

There are three compelling reasons to get a move on when it comes to buying a home.  1) You may be eligible for that $8000.00 first time home buyer tax credit, 2) homes are on sale, 3) most importantly, interest rates will probably increase.

The $8000.00 Tax Credit

First time home buyers have been given a gift from our all knowing, all powerful federal government, provided they close escrow on a home before December 1st, 2009.  For more information about this program, and whether or not you qualify, please visit this page.

Homes are on Sale

As you’ve already heard over and over again, due to foreclosures and short sales, homes are at incredible prices, but that won’t last forever.  Real estate, over time, is bound to increase in value, especially in Scottsdale.

Interest Rates Increasing

This is the overlooked component by many.  So many people look at the price of a home and forget that borrowing money costs money, and waiting for the price of a home to decrease even more could very well be offset by an increase in the interest rate on your loan.  At the same time, if you wait too long, you’ll miss out on an additional $8000.00 tax credit from the government.

A $100,000.00 home financed for 15-years on a fixed interest rate of 4.85% will cost you a total of $140,940.00.  The same home at 5.85% will cost you $150,940.00.  If my math is correct, that’s $10,000.00 more.  Divide $10,000 by 15 years and you need to recover $667.00 per month in property value appreciation to offset the loss.

If you wait thinking that $100,000 home may sell for $90,000 in a few months, at 5.85%, which is what the interest rate may be in a few months, you’re paying $145,395.00 for a home that you could have purchsed at 4.85% for $140,940.00.  That means that waiting around only saved you $5545.00, not $10,000.  AND, you missed the tax credit, so you’re out a potential additional $8000.00.

Shown above, your 15-year fixed mortgage at 4.85% will cost you a total of $140,940 over the course of 15 years with a monthly payment of only $783.00.

The following shows that the same mortgage at 5.85% increases your payment by about $50.00/month and costs you an additional $10,000 over the term of the loan.

The graphic below illustrates that waiting for a $10,000 decrease in price puts you at risk of getting a loan at a higher interest rate, assuming interest rates increase, which most of us expect to happen.  Your savings would be determined by subtracting the cost of your $100,000 home at 4.85% from the cost of the same home at $90,000 at 5.85%.  The difference is $5545.00.  Not as much of a savings as you would have liked.

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