After looking at all the costs involved in buying house, you may have begun to have second thoughts: “Perhaps, it is better to rent a home.” Real estate in most areas today is not a top investment compared with investment securities.
Some will advise that you won't get a 30 percent return on your house in today's market. In the past decade, people have been advised to think of a home "as shelter not investment". Wealth accumulation is supposed to be secondary.Still, as shelter, most experts say if you can afford the down payment, it makes sense to buy your home rather than rent it. That's because you can deduct mortgage interest on income tax and build equity in your property. This is especially true when mortgage interest rates are low. Mortgage interest rates are deductible up to a $100,000 annual limit.
Example
A homeowner has a gross annual income of $40,000. The monthly mortgage payment is $1,000 on a 30-year mortgage. In the first few years, 80 percent of that payment goes to interest and is therefore tax deductible. In the 15 percent tax bracket, the homeowner saved about $375 more in taxes with the home provision versus with only a standard deduction.
Lease-Purchase Agreements
Some people take a middle road. They ease into home ownership by renting a house or condominium with an option to buy.
- Lease-purchase gives a buyer time to save for a down payment or to clean up a credit history.
- It can work in a buyer's favor in areas where real estate values are rising quickly at a rate of 10 percent a year. A buyer benefits from this appreciation because the purchase price of the home is locked in on the day the buyer signed the rent-to-own contract with the seller.
- In most agreements, the seller allows a portion of the rent to be applied towards the purchase price, which some lenders consider to be part of the down payment. The amount of rent credited could be 10 percent to 100 percent, based on your contract.
- Most rent-to-own options require some down payment to secure the agreement, which is not refundable in case the renter decides not to buy.
Home owners who would agree to a lease-purchase option include people who have had property on the market longer than they wish or owners who had to move and want the house to be lived in. The owner benefits with rental income to help pay the carrying costs of the home, and the strong possibility of selling the house when the contract expires.
The 6% Solution
A seller concession is one strategy that can save you money. This is how it works: Suppose you agree on the price of the house at $200,000. You then ask the seller for a 6% seller concession.
What this means is that you add (up to) 6% to the price of the house. That's right, you're now going to pay $212,000 for that house, but the seller is going to give you that $12,000 back when the sale takes place. You're going to use that money to cover all of your closing costs.If we pretend for a moment that those costs add up to precisely $12,000, then what you've done is folded those closing costs into the mortgage. Points, title search, recordation fees -- all of the items that you'll find listed in our "closing costs" article, and most of which are not tax-deductible -- have effectively been included in your mortgage. Since your mortgage interest is tax-deductible, these costs have effectively become tax write-offs.
In addition, you don't have to come up with all that extra cash at settlement. Your down payment will be somewhat higher, (if you're putting down 20%, then in the current example your down payment would be $42,400, versus $40,000) and, of course, your mortgage payments will be higher, but it ends up saving you money.
What’s The Catch?
The seller has no reason to refuse this -- after all, the agreed-upon price is still the same. The catch is that the house has to appraise for the higher value. If the appraiser comes back and tells you that this house won't appraise for higher than $200,000, you can't do it.
Let's look into this a little further. Say you buy the house for $200,000. Your $40,000 down payment leaves you needing a loan for $160,000. You get a 30-year loan at 8%. Your monthly payments for principal and interest are $1,174. Now, say you decide to use the 6% seller concession strategy. You buy this house for the price of $212,000. You put down 20%, and this leaves you needing a loan of $169,600. Your monthly payments will be $1,244, or $70 more per month.
Is It Worth It?
The key to saving money on your mortgage is to get the best possible mortgage for yourself. Sounds so obvious it's silly, right? But the point here is that you don't need to do it the way everyone else does. In fact, if you're willing to educate yourself in the ways of the mortgage world, you can save quite a bit of money by being a little different. But remember, the only person who knows if it's right for you is YOU.
To begin with, many people aren't going to feel an enormous difference between paying the extra $70 per month -- not nearly as much as they would feel over having to fork out an extra $12,000 all at once. But what about the fact that you have to now pay this extra money over the course of 30 years? Well, over the course of 30 years you're paying $25,200 more for that extra $12,000 ($70 more per month x 12 months in a year x 30 years = $25,200). However, remember that's $12,000 less out of your pocket at the time of closing. If you take $12,000 and invest it at 10% (less than the market average has returned over the past 35 years) then your money will grow to over $200,000 (before taxes) at the end of 30 years. So, in this scenario, it's well worth it.
Naturally you'll want to run the numbers for your particular loan to see whether it would be worth it for you.
Note: there are certain rules under certain mortgages as to what the seller can actually pay for at closing. If you get $12,000 from the seller and all of your costs are $12,000, this does not necessarily mean that you won't have to pay anything. Be sure to ask your lender which costs the seller may cover.
The headline reads "Growth Continues," but probably the big news coming out of Freddie Mac's November 2005 Economic Outlook was that, for the first time since August, that headline wasn't about yet another hurricane.
Still the lingering impacts of Katrina, Rita, and Wilma were prominently featured in the report issued by Freddie's Office of the Chief Economist.Projected Employment Growth Stunted By Hurricanes
October's job report showed an increase of only 56,000 new jobs added to the economy. This was far better than the 8,000 net job losses in September, largely attributed to Katrina, but far less than the 310,000 plus that had been projected for September and October combined before the triple weather whammy. Areas outside of those directly impacted by the hurricanes shared in the reduced job growth figures, possibly because of factors related to the weather-related spike in energy costs.But, as the rebuilding effort presses on, the expected jobs should return.
Federal Reserve Boosts Federal Funds
Rising inflationary pressures driven by increasing fuel prices growing out of the hurricanes as well as other factors caused the Federal Reserve to once again boost the federal funds rates by one-quarter point to four percent. This had the effect of pushing up the prime rate which is the index for home equity lines to seven percent and affecting other short-term interest rates upon which ARMs are based.
Home Owners Improving Mortgage Positions Through Refinancing
Still, the report states that home owners are continuing to pull mega-bucks out of their homes through refinancing. Freddie Mac's Cashout Refinance Report for the third quarter ended in September shows that home owners drained $80.4 billion from the equity of their homes through financing. The total cash out for the year is expected to reach $204 billion. And home owners were still able to improve their mortgage positions through refinancing. In spite of generally but not steadily increasing rates during the third quarter, those who refinanced were able to lower their rates for a 30-year fixed mortgage by 57 basis points; $55 per month on a $150,000 loan.
Expectations Are High
The report predicted that the Consumer Price Index would increase to 4 percent during the fourth quarter, reflecting the short-term impact of the hurricanes. The October prediction for the CPI was 3.3 percent. Still the CPI is still expected to return to the mid-two percent range by the 1st quarter of 2006.
The report increased the long standing forecast of year-end fixed rate mortgages at 6 percent by year end to 6.2 percent and projected a yearly average of 5.9 percent and 6.4 percent for 2005 and 2006 respectively. The ARM which, as reported earlier, zoomed above 5 percent last week for the first time in three years, is expected to average 5 percent for the 4th quarter and 4.5 percent for the year.
New Housing Demands Stand Strong
Freddie Mac expects that the demand for new housing will remain strong but that housing starts will decrease 7.3 percent in 2006 to 1.9 million units, largely as a result of rising rates. This is consistent with earlier predictions.
Fourth Quarter Appreciation Declines, But 2005 Homes Sales Predicted To Set A Record
Home sales are still projected to set a record this year at around 7.5 million units, but will drop to 7.0 million next year. This is actually a brighter picture than the Chief Economist painted in his August report when he predicted 6.80 million home sales next year. Home prices are expected to appreciate 5.4 percent during the fourth quarter of 2005, a far cry from the range of 10.5 to 15 percent appreciation in the last three quarters and a decline from the 7.4 percent projected in August for this last quarter. Annualized appreciation for this year should be 10.2 percent and 7.3 percent in 2006. These are still healthy price increases and they apparently will continue, driven both by a strong economy and high home building costs.