Cost of Not Buying a Home
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).
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