Brenda RichterkessingcloseAuthor: Brenda Richterkessing Name: Brenda Richterkessing
Email: brenda@rkihomes.com
Site: http://www.rkihomes
About: See Authors Posts (2)

1)  Rent Lost

Rent = $1,200/mo.  The average person takes 30 days to buy.  If you wait 6 months, you will pay your landlord $6,000. 

2)  Rate Change

If today’s rate is 5.5% on a 30 year fixed rate mortgage, assuming a $200,000 sales price with 5% down:  Your payment will be…$1,073 per month…

The following shows what happens to your payment if your rate goes up by the time you buy (in ½% increments)

Rate	Payment	Loss/mo	Cost/YR	Cost 7/Yrs	Cost 30/Yrs
6.00%	$1,133	$60	$720	$5,040	$21,600
6.50%	$1,194	$121	$1,452	$10,164	$43,560
7.00%	$1,256	$183	$2,196	$15,372	$65,880

This number you must look at from the long term picture.  If you wait 6 months to buy a home, it is possible that the rates will be up .5%.  The cost/loss to you IS NOT $60 per month.  The cost is $60 per month times however many months you own the home.  The average American owns a home 7 years, so that loss equals $5,040.  If you keep this home as a rental property (a great idea especially for your first home and when rates are this low) then the loss is times 30 years, or $21,600.  Of course if you look at it like a good financial planner would, your loss is not simply the $21,000 but it’s that amount times the opportunity cost of lost interest had you invested that money yielding 5%-10% appreciation compounded annually.  This of course multiplies the loss to 2 to 3 times the actual cash loss!

3)  Appreciation Lost  (Assuming a $200,000 sales price)

Appreciation	Per Month	6 Months	1 Year
3.00%	$500	$3,000	$6,000
5% *	$833	$5,000	$10,000
6.00%	$2,000	$6,000	$12,000
8.00%	$1,333	$16,000	$32,000
10.00%	$1,666	$20,000	$40,000

* Metro Atlanta typically appreciates at an average rate of 4%-5% per year.  Atlanta was predicted to appreciate 24% over the next 5 years (CNN.com “Top 10 Places to buy - NOW”)

4)  Tax deduction/interest write off

This is the trickiest of the calculations because everybody’s tax situation is different, and the tax code is a tad bit complicated.  But as a general rule, you can write off 100% of the interest portion of your payment.  And if you didn’t know, the interest portion is MOST of the payment (for the first few years anyway)

For example:  using the examples above, with a $1,073 per month payment ($190k loan @ 5.5%), the interest portion of the first payment is around $850 per month.  So that’s the write off that you will NOT be getting per month until you buy.  Most people buying this price home are in the 28% tax bracket plus 6% state.  That means the actual cash loss is the monthly payment times your tax bracket.  Let’s say 33%.  So in this example, you are losing $280 per month CASH in tax deduction that you are not receiving.  That’s not even taking in to account that writing off $10,200 per year ($850 times 12 months) would probably take you in to a lower tax bracket; consequently, you would pay taxes at a lower rate.  So…your “lack of deduction loss” is approximately, $250-$300 per month.

SUMMARY:  IF YOU WAIT 6 MONTHS TO BUY, YOU ARE LOSING BETWEEN $8,000 AND $15,000 IN THAT TIME ALONE.  IF YOU MISS TODAYS RATE, IT COULD COST ANOTHER $15,000 TO $100,000 MORE OVER THE LONG HAUL.

One Last Point:  Affordability and Lifestyle

I do not recommend ANYONE BUYING A HOME that they can not afford, or that will make them “house-poor”.  I recommend that you should be fairly conservative.  This means add up your PITI (total mortgage payment with taxes and insurance added in) and your payment should NOT be above 30% of your GROSS monthly income (before taxes).

Remember this though:  If you “wait” to buy, that $200,000 home will most likely be $210,000 next year (5% appreciation).  So the question you must ask is, “Is my income going up 5% per year?”  If not then you will be able to afford LESS in a year than you can now.

*  This is not intended as an earnings claim on purchasing rental property.  Past results are not in indication of future performance.  Please consult your tax advisor.  (ask about the W-4 form). 

Popularity: 62% [?]

This entry was posted on Friday, February 8th, 2008 at 12:49 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.