Real Estate Blog
Tuesday, April 20 2010
Who Cares If I Miss Out On The Tax Credit?
Many people who are looking to buy a home now, NEED the Tax Credit to close a gap in their finances. But not everyone feels that way.
As the days tick away, I have started to hear some buyers already begin rationalizing why they haven’t yet gone to contract. They say things like, “$8000 isn’t enough money to rush me into buying a home”. I am not sure they are right (especially as you see interest rates on the rise at the same time), but I do know that for people who “discount” the impact of $8000 need to open up their minds to some “out of the box” thoughts.
Here’s one thought process: If a customer had sufficient monies to close and cash reserves in the bank after closing such that they didn’t NEED the $8000, as they contend, I would propose to those clients… this strategy. Pay $8000 in additional Discount Points on your mortgage! You see, by doing this our buyers gain two benefits:
First, as I am sure we all know, Discount Points are tax deductible as prepaid interest on the mortgage. That means our Buyer (assuming a 28% top Income Tax Bracket) will receive a $2240.00 higher tax refund next year…..that’s good!
Second, by paying 2 points on a $400,000 mortgage (cost $8000), our borrower is likely to receive approximately a .50% lower interest rate on their mortgage. Over the course of the first five years of homeownership, they would save nearly an additional $8000 in monthly mortgage payments…that also is good!
Or, How About This? By paying the points for a lower rate, you would reduce your Principal & Interest Payment about $132/month on your $400,000 loan. If you were comfortable with your original payment, you could actually borrow an additional $20-25,000 for the same payment. That’s $20-25,000 that you could put into a 203K loan to finance home improvements OR it’s buying the bigger house OR buying in a better part of town….for the same payment you were willing to accept without the tax credit.
Here’s another: $8000 is enough money for a skylight, a living room set, a large Jacuzzi/hot tub, a deck, an awesome barbecue, an above ground pool, a plasma television or one of dozens of other cool things you might want to add to your new home. Or maybe, it’s the money for a vacation or a top notch House Warming Party. Whatever you spend it on, it’s basically a FREE GIFT from Uncle Sam. How many great moments or memories can you “buy” with this gift of $8000?
One more: $8000 untouched in a conservative investment (like Savings Bonds) at 6% would compound to more than $25,000 in 20 years to help pay for college, a wedding or a car. In 30 years, when you retire, it would blossom to more than $46,000! That’s a lot of trinkets for your grandchildren.
Remember, this is money you didn’t need. This is money that didn’t provide sufficient incentive to force you to BUY NOW. Don’t be silly, take the money and enjoy it! Save monthly, improve your home, improve your lifestyle, or improve your future. Any way you look at it, $8000 can go a long way.