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Congratulations, you missed the $8,000 tax credit

Reblogger
Real Estate Agent with CoastalVa Realty Inc

I have been thinking this for a while, and thanks to Jim Lee, I don' even have to do the math.

Yes, this is a great time to buy real estate, and with winter coming prices will stay stagnant in our Hampton Roads area.

 

To SELL or BUY  Real Estate in Virginia Beach, or Hampton Roads visit my website. http://www.tererottink.com/  visit my Blog at HamptonRoadsrealEstateVoice.com 

Call me at: 757-502-5324

Riverwalk Chesapeake VA-  Neighborhood I

Original content by Jim Lee, REALTOR, CRS, ABR New Hampshire & Maine

No, I'm not being facetious or implying you're a dummy because you haven't bought a house yet.

knoxville tn real estate houses homes condos and land for sale

 

In fact, just the opposite; waiting until now to buy has saved you thousands of dollars more that than measly 8 grand credit a lot of your friends got earlier this year. Here's how.

Let's take a look at the facts and mortgage market now compared to what they were then.

The $8,000 federal tax credit that got everyone excited earlier this year expired at the end of April, 2010. Buyers that had a contract dated prior to that were able to claim the credit up to the maximum amount of $8,000. and also got a loan with an interest rate around 5.5% or so.

If they bought the median priced house in the Knoxville, TN area, which would have been around $180,000, and got an FHA insured loan with the minimum 3.5% down payment they would have a monthly mortgage payment of $986.25 for their principal and interest. Taxes and insurance are added to that amount.

However, because you waited until now for whatever reason, interest rates have continued to drop. In the current mortgage market you can get an interest rate as low as 4.25% which would lower your monthly principal and interest payment to $854.50 or $131.75 LOWER than your friends who bought earlier this year and got the tax credit.

One huge benefit to you with the lower interest rate is that it's actual cash you're saving each month you can use for savings, bill paying, or whatever you choose.

And if you only own you house 5 years and 1 month and then decide to sell and move up, move down, or whatever, you have then saved $8.036.75 in actual cash payments which puts you Waay ahead of your friends and their $8,000 credit 5 years previously

Finally if you end up keeping your house and paying off your 30 year loan over the whole term you save a whopping $47,430 in actual monthly payments over your friends who bought earlier.

So if anyone tells you that you've missed the boat on that now expired tax credit,just whip out your calculator or this article and explain to them how you decided to wait until conditions were 'more perfect', as they are now, before pulling the trigger on your new home purchase. Then show them how much more they're paying compared to the sweet interest rates you're now able to take advantage of.

In the greater Knoxville, TN are visit www.KnoxvilleHomeCenter.com to see all the area homes for sale.

A little further north, Portsmouth, NH and Seacoast area buyers can visit www.NewHampshireMaineRealEstate.com. The state of New Hampshire also has a stunning 3.5% rate through their New Hampshire Housing program. These are the lowest rates in their 30 year history.

The only dumb question is the one you don't ask; call or email us.

 

Jim Lee, CRS, ABR, GRI, ACRE, NAR Certified e-PRO Trainer
*****************************************************************
Visit my blog: www.KnoxvilleTennesseeRealEstateBlog.com
Realty Executives Associates, Knoxville, Tennessee
See all Knoxville area Realtor listings at: www.KnoxvilleHomeCenter.com
(865) 693-3232, My Personal Toll Free # 1-800-662-2488 ext. 163
mailto:Jim@JimLee.com

Click here to subscribe to my blog and get up to the minute news and reports about real estate in the greater Knoxville, Tennessee area.

 

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Comments (3)

Mel Ahrens, MBA, Kelly Right Real Estate
Kelly Right Real Estate - Hood River, OR
Customized Choices for your Real Estate Needs

This marketing strategy does not include several key, basic financial concepts.  The $8,000 credit has earnings power (even if it "just" reduces the purchase price) and the interest expense is deductible on tax returns.  Factoring these into the scenario can change the conclusion being drawn.

Yes, the interest rate decrease is absolutely going to be a big money saver over time.  The longer they are in the house the more money saved on interest expense. 

However, I believe the example cited is too simplistic.  Reducing the interest amounts paid over the term on the loan by the tax credit 30 years earlier does not factor in the compounded earnings of receiving the $8k thirty years earlier.  Purchase price $180,000, 3.5% down. Loan balance is $173,700 in both the April (month tax credit expired) and Sept (now).

Investing the $8k in tax free 30 year Treasuries on April 30, 2010 would yield a return of 4.53%.  At the end of 30 years that is $22,220 of earnings to offset the interest expense paid. That does not include the $8k.

Interest expense is also deductible on your tax return, subject to limitations (limitations apply only for a small portion of taxpayers).   

Loan in April with $8k tax credit:         Interest costs of $181,350 less $22,220 (earnings on $8k of 30 year Treasuries) plus the tax benefits of $39,783 means a cost of $119,347.  And it is also reduced by the $8k received in 2010 for a real cost of $111,347.

Loan in Sept with lower interest rate:    Interest costs of $133,920 with taxable benefits of $33,480 for a real cost of $100,440.

Conclusion 1:    Over a full term of the loan, in the low down FHA situation, to full 30 year term, the buyer receiving the tax credit is worse off after recognizing the earnings from investing in tax free Treasuries and the interest expense deduction.  Point confirmed - correct? yes, for these very specific, limited circumstances.

In a 20% down payment scenario, the tax credit purchaser is  better off than the Sept purchaser.  I won't go through the calculation again - if you want to see it, email me.

However:  This too is probably overly simplistic as most people do not invest in tax free Treasuries.  A more likely scenario might be investing in the stock market.  Over the long term (30+ years for comparability), the average before tax return from the stock market has been 8-10%.  Assuming an 8% return, there are total earnings of $72,500.  This is taxed at the marginal rate of 25% ($18,125) reducing the after tax earnings to $54,375.  This is an additional benefit of $32,155 over the Treasuries example making the real cost for the person receiving the credit $79,192.  That means the Sept buyer missing the tax credit with the lower interest rate "paid" $21,248 (26.8% more!) more in real costs than the buyer receiving the tax credit.

Not quite the rosy scenario painted above.

Conclusion 2:     I'd rather have the tax credit. And I can refinance at the lower interest rate too. Getting the tax credit and refinancing are not mutually exclusive for the next 30 years.

If you made it through all the numbers and arrived here - all of the above is most likely not going to happen.  Very few people actually keep their 30 year mortgage; most have an earlier time horizon.  It could be interest rates are lower and they refinance, or they move or ....... Life "happens" over 30 years.

The above analysis does not incorporate the present value of money, which brings all of the money streams back to a common point.  No, I won't have you go through that detailed analysis, but here is a simple comparison.

Which would you rather have:  $8,000 now or $8,036.75 in 5 years and one month? I would be glad to borrow $8,000 now and pay the lender $8,036.75 in five years and 1 month.

The earnings on tax free Treasuries in 61 months is over $1,600.  The value of $8000 today is not the same as $8,000 of interest saved over the same 61 months. You have to compare the cash flow stream at a common point in time (the present value) to be meaningful.  Otherwise it is misleading and wrong.

Final conclusion:    Be careful/skeptical of overly general and simplistic scenarios when comparing cash flows and interest rates.  The Denver Post had an overly simplistic article (similar to this scenario) in the business section.  Real life is a lot more complicated than a lowest common denominator news article.

Mel

FYI - This was my comment on the original blog.

Sep 13, 2010 06:01 AM
Tere Rottink
CoastalVa Realty Inc - Virginia Beach, VA

Mel,

Your example assumes that the buyers saved the money they received back at the time of their taxes, but I believe that most buyers that qualified for the $8,000 spent at least most of the money on their new home and other things. That would be an interesting survey.

In the article it is not mentioned that prices have continue to  drop as many sellers offered a decreased in price to match the price of the expired tax deduction and foreclosures continue to flood the market.  

Tere

Sep 13, 2010 06:57 AM
Mel Ahrens, MBA, Kelly Right Real Estate
Kelly Right Real Estate - Hood River, OR
Customized Choices for your Real Estate Needs

Hi Tere,

The most likely scenario is some sort of investment as mentioned - almost anything other than burying it in the backyard or under the mattress is investment.

Buying assets/services rather than investing in Treasuries or equities is just another form of investment.  Companies and individuals do it all the time - they spend capital (cash, tax credit, etc..) on assets/services which they expect (albeit unknowingly) to get a higher rate of return than investing cash. Most people just don't think of it in those terms.

If a buyer used the tax credit for their house down payment or for fixing up the property or buying a riding lawn mower or a vacation, etc.. they were still investing.  Some forms of investment are wiser than others.  Investing takes all forms, from grocery buying to cars to homes, etc... Any purchase is an investment of some sort.

It will be interesting to see how the academic and government economic "studies" of the tax credit "benefits" turn out.

The marketing story/focus should be on the historically low interest rates, not on being better off by not taking the tax credit.  Comparing/subtracting two dissimilar numbers (apples to oranges terminology applies here) and not factoring in basic financial principles (future earnings power of money/assets now, tax impact of cash flow and present value of two different cash flows, etc...) provides a simple answer, but an erroneous one.  The longer the timeframe, the more significant the mis-statement.

Non-real estate example:  The Euro is not worth a dollar - one Euro is worth $1.29 as of today. Subtracting 50 dollars from 100 Euros, without converting it to an equivalent value, is not $50 dollars or 50 Euros.  They have to be compared on equivalent basis to be meaningful. 100 Euros = $129 less $50 dollars = $79 not $50. They need to be compared on an equivalent basis, not a numerical basis.

Buyers should ask a financial advisor or skilled tax preparer for advice - not the marketing spin of this scenario as it is a mis-statement of the true picture.

Mel

Sep 13, 2010 12:30 PM