Create Your Own Buyer Stimulus Package
The Federal Government's Homebuyer Tax Credit may have expired on April 30th, 2010; but just because Uncle Sam has turned off the financial spigot aimed at housing doesn't mean home buyers still can't get "something extra" during their purchase. The keys for buyers today are how they negotiate and structure the terms of their offer.
This month, YOU Magazine turns to national mortgage expert and consultant, Jim McMahan. McMahan is Director of Training and Education at LoanToolbox, the leading education provider to thousands of mortgage professionals across the country.
The Fed Checks Out
Just because these programs have ended doesn't mean that home buyers can't seek credits from the seller to accomplish something similar. Successful investors will tell you that money is made when you buy something right with favorable terms, not just when it is sold.
What's More Important? Low Rates or Tax Credit
There's a good reason for this statistic. For example, if you purchase a home for $300,000 and finance $270,000, and your interest rate for a 30-year fixed rate loan was 5.25% versus 4.75%, you would pay nearly $30,000 more over the term of the loan. This is a significant amount of money!
Since the Fed's Mortgage Backed Securities purchase program ended on March 31, there has been much volatility and price swings in the markets. Rates overall are off their lows and are often quoted above 5.00% today with no points.
Looked at from another perspective, if prospective home buyers are waiting for home prices to decline a bit more before purchasing a home, but interest rates push higher towards 6.00% in the meantime, waiting could well cost those home buyers more money in the long run.
In fact, let's say a home buyer delays a transaction but receives a $10,000 reduction off that $300,000 home. If, in the meantime, rates were to rise .75% to 6.00% and the buyer financed 90% of the purchase price, the amount of total payments over a 30-year term would be over $35,000 more than paying the $300,000 purchase price and the 5.25% interest rate.
An Idea to Save Money Up Front and Over Time
Many buyers focus on the sales price when negotiating and this is understandable. A home is typically the largest transaction home buyers have been involved with and the price paid factors in immensely on what it will cost them each month.
However, in negotiating the terms of the contract, a buyer can also negotiate to have the seller contribute money from the proceeds to allocate towards the buyer's closing costs. This money can be used towards either the reduction of cash required to close and/or a reduction in the interest rate on the mortgage.
Double Bonus by Seller Paying to Lower Rate
However, one aspect of this situation not often considered is that the IRS treats points paid up front to lower a mortgage interest rate as pre-paid interest, regardless of who pays the fees. This means that when buyers negotiate to have the seller pay the costs to lower their interest rate, they receive the benefit of deducting them on their income taxes in the year the home is purchased.
If the costs to reduce the interest rate are 2.00% to obtain a lower interest rate, the $5,400 in this scenario, 2.00% of $270,000, would be deductible as pre-paid interest, netting additional money back to the buyer at tax time.
Time to Look at Your Options
In addition, home buyers who would like to investigate seller paid points as an option may find that they can purchase a little more expensive home.
Contact the professional who supplied you with this month's issue of YOU Magazine to explore all the options that are available to you and also to help you fund your own personal stimulus package.
Source: You Magazine
S.G. Billings Realtors
18670 Hwy 1431, P.O. Box 5158, Jonestown, TX 78645