The bloom is off the rose on the $8000 tax credit with a flurry of activity to close in November, but just when you thought that it was over, it was renewed. It doesn't look like it has caused another uptick in contracts like before, but in 2010 I do believe that some will be rushing to meet the deadline. One complication could be rising interest rates. Yes, if it reaches 6.5% that is still incredibly low, but it can take buyers out of the system who are young and first time buyers. They didn't experience double digit interest rates like us older folks, so they might sit on their hands instead of signing a contract waiting for a return of 5%. But there is a way I think we can get them off the fence, and deal with higher rates. It is going back to a program that has been around for some time, the 2/1 and 3/2/1 buydown. This is when a seller prepays interest for the buyer upfront at closing, and reducing the payment for a specific period of time. Let's start with the 2/1 buydown.
I am using a new spreadsheet from Pat Zaby at www.patzaby.com. This is a simplified version of one of his Excel spreadsheets. I am not being paid by Pat, but I have used his programs for 16 years and highly recommend them. The chart shows a comparison between giving a price reduction on the house, or using the funds for a buydown. As you can see, the buyer benefits from a reduced payment in the first two years greater than the price reduction, and the percentage of closing cost paid leaves you with some room for other buyer expenses. Here is the really fun part. They don't just get the tax credit, they also get to take the $4,281 as a tax deduction in the first two years. remember that this is prepaid interest, and interest is deductible. That is turbocharging the tax credit with an added value. Now lets look at a chart of the 3/2/1 buydown.
We are taking a bit more expensive home and using a 3 year example of the buydown. The closing cost are still around 4% and look at the savings here, over $500 per month in the first year. I am not a crazy optimist but I do believe that in the next few years, our economy will be going stong again. I listened to a Charlie Rose interview with Warren Buffett, and he still strongly believes in the inventiveness and resolve of the American people. Our job as realtors is to give good financial advice to our clients and owning a home still has the same tax value it always had, but we need to create a bridge over troubled waters for them to get to that next rise in the American economy. The buydown could just do that.
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