Lower interest rates may have replaced the Home Buyer Tax Credits for now. The vast majority of the country either missed out or didn’t qualify for the $8000 First Time Home Buyer Credit. I always stated that the Credits were not a reason to buy a home but a bonus. Interest rates play a key role in home buying and it happens that since April 30th when buyers had to be in contract to qualify for the credit and now, interest rates have dropped even more.
The following chart uses a rate of 4.875% quoted on April 26th and a rate of 4.25% quoted from the same source on July 12th. Both rates are for 30 year fixed rate mortgages and are used for example purposes- talk to your mortgage broker about your ability to qualify for an interest rate.
|$ 100,000||$ 200,000||$ 300,000||$ 400,000|
|Payment difference / month||$37.27||$74.54||$111.80||$149.07|
|$8000 saved in number of months||214.66||107.33||71.55||53.66|
|Cost of loan over 30 Years 5.5%||($190,514.96)||($381,029.92)||($571,544.88)||($762,059.84)|
|Cost of loan over 30 Years 4.25%||($177,098.36)||($354,196.72)||($531,295.08)||($708,393.44)|
|Savings over life of loan||$13,416.60||$26,833.20||$40,249.80||$53,666.40|
This is a very basic analysis of the situation. A more through analysis might include:
- If a buyer had put the $8000 check from the IRS into an interest earning situation. You can’t buy a flat screen TV today with a lower interest rate.
- If a buyer decided that they were not going to own a home long enough to make use of a 30 year loan or thought that after 5 years they could still refinance into an attractive rate: a $200,000 5 year ARM from the July 12th rate sheet at 3.25% would save $188/mo over the April 26th 30 year fixed, recovering $8000 in payments in 43 months. Thirty year loans are often considered the “standard” but there a lots of loan products out there.
- Whether a current Home Buyer Tax Credit qualifying buyer still in escrow could “double dip” by getting a lower rate by buying down their interest rate presuming they had already locked.
- What happens if sales prices drop or increase?
The point is that there are so many factors that drive the investment side of owning a home. One factor may be up or down any time. Each buyer needs to decide what factors, including the emotional ones, make up their reasons to buy.