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Lower Interest Rates Repace Tax Credits?

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
26-Apr 4.88% ($529.21) ($1,058.42) ($1,587.62) ($2,116.83)
12-Jul 4.25% ($491.94) ($983.88) ($1,475.82) ($1,967.76)
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.

4 Comments on “Lower Interest Rates Repace Tax Credits?

  1. I don’t get the comparison between the interest rates–where is the $8,000?

    Why not $100,000 financed at 4.25% versus $92,000 at 4.88%?

  2. The first two lines in red are you payments for a given amount. They are negative numbers as they are payments.
    The third line is the difference in payments.
    The fourth line is the number of months it would take to save $8000 in payments between the two interest rates. That’s 214 months for a $100,000 loan and 54 months for $400,000. Most people won’t keep their home 214 months but many will make it to four and a half years; its all about your individual plan. Rates dropped .625% in six weeks.

    The IRS mails checks to those that are eligible after the transaction closes (and they are said to have a huge backlog). You would have to float the $8000 yourself until that check arrived if you wanted to have $92,000 loan. You could pay down the mortgage with the check when it arrived to get to $92,000 but I highly doubt that is what the majority of people are doing when the they cash the check.

  3. So you’re suggesting that it’s $8,000 today or wait 214 months for the $8,000, and that’s equal?

  4. No, I am not suggesting that. I said that most people won’t own their home 214 months. If you enter into a contract to buy a house today you don’t have the $8000 credit option. It is gone. I am suggesting that you have to look at all the components in a home purchase. Interest rates tend to have a long term effect and are tied to the value of the loan. This, as I stated in the original post, is a simplified snapshot of one of of those components.

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