I've just come from a nearby real estate office and once again another listing agent has lowered the price of a client's home in response to the current market. It is a tough market and I can understand the decision to try and make the home more attractive to buyers. Is lowering the price the best way to do it?
This particular home previously had an asking price of $225,000 and has now been reduced to $215,000. Not only has the agent reduced their potential income by $300, the seller is now losing $10,000 in equity and is seeing a reduction in the potential tax benefit they might have seen at the original price. The buyer is also losing out because the potential tax benefit and payment savings has just gone out the window as well. Yes, I did say payment savings. The scenario shown below assumes a 20% down-payment being made by the buyer.
The agent has reduced the price by $10,000 and the potential homebuyer may see a savings of approximately $49 for because of this. What if instead of lowering the price, the seller agreed to buy down the interest rate for the buyer? The seller can still ask full price while saving over $3,000. As a result, the buyer will have a payment that is lower by $127 per month!
$127 may not seem like a huge amount to some, so let's express it in another way. Over a 5 year period that same $127 comes out to a Net Savings of $4,150!
Still not convinced? Alright then. Take that same $127 and apply it to the monthly mortgage payment and the new homeowner will save $43,282 in interest over the life of the loan. Not only that, the life of the loan has been reduced from 30 years to 23.2 years. That's 6.8 years sooner!
Since the seller paid for the buyers closing costs in the form of discount points, they may be able to use this as a deduction at the end of the year. The buyer may also benefit from the discount points as they are shown on the HUD as an expense of purchasing the home.
We all know how hard real estate agents work and by not reducing the price, the listing agent and buyer's agent will see all of their hard work repayed with a higher commission.
My scorecard shows, the listing agent getting paid what they deserve for their hard work; the buying agent is rewarded for recognizing a great deal for their client; the seller get's their full asking price and possibly recieves a greater tax benefit; the buyer sees a dramatically lower mortgage payment, an incredible saving on interest payments, and will own their new home much sooner than anticipated; and the time on market will be much less because the home was obviously a great deal!
I am a little surprised that the loan officers some agents are currently working with are not providing them with information like this in order to help them sell the homes they are listing. Maybe they do but do not have the necessary tools or are not able to provide it in a format that is useful to the agent.
Maybe, we should talk...
Shawn Anderson, Mortgage Planning Specialist
Shawn Anderson is a mortgage planner and not a tax advisor. Actual tax benefits may vary and you should consult a tax advisor for your own specific scenario. If you would like to be referred to a tax advisor, Shawn will be happy to refer you to his preferred business partner.
NOTICE: This is not a commitment to lend or extend credit. Restrictions may apply. Information and/or data is subject to change without notice. All loans are subject to credit approval. Not all loans or products are available in all states. Washington State Loan Originator Lic: 510-LO-32174
Hello Everyone,
Last Friday I created a presentation about the RateWatch service that I provide for past clients. Please click here to go to the RateWatch page on my website and then select the link to the RateWatch video. There you will here all about the service.
This presentation was created with Jing. Jing is a program still in it's beta form. Even so, it does provide a great way to get your information out to the masses in a more creative way.
Please let me know what you thought of the presentation.
Shawn
There have been numerous articles and presentations written on why someone should own a home instead of renting. One common argument against renting has been, "why would you want to pay your landlord's mortgage?" I always chuckle a little when I see or hear that since the same person writing that or saying it is the same person that would help finance a rental property for you in heartbeat, making you the landlord whose mortgage is being paid by someone else. See the irony?
Not one to be left out, I too have something to say about renting versus owning a home. Renting bad, owning good. Okay, I have a little more than that to say. I always like using real life scenarios for my Blog entries and this is no exception.
I have a lovely couple that have been lifelong renters and have now decided to take the plunge into homeownership. They have been lucky enough to find a house to rent for the low, low price of $580 per month. And of course, they don't want a mortgage payment that is much higher than that. Luckily, they have saved and now have a sizeable amount of money to put down.
Now, this lovely couple has been pre-approved by me for a purchase price of $205,000. However, they have become a little hesitant about purchasing because of the increased monthly payment.
Their current monthly rent is $580 and they pay $25 per month for renters insurance which bring their total monthly payment to $605. We are going to assume an average annual rent increase of 3%.
The proposed monthly mortgage payment is $888 and with an additional $197 per month for insurance, taxes and the dreaded mortgage insurance, their monthly mortgage payment is at $1,085. Actually, their tax bracket is 15% and they will be paying down their principal with part of their payment so their monthly mortgage net cost is actually $752.
Based on their desire to buy down the interest rate to 4.750% plus a down-payment of approximately 17% of the purchase price, their total cash to close is $42,665.
Based on their current rent payment, they will pay $38,452 over the next five years should they decide to continue renting. At seven years they will have paid $55,431 in rent and have zero equity in their landlord's home.
If they decide to purchase, at five years they will have paid a total of $63,258 in principal, interest, taxes, and insurance (PITI) payments and in case you are wondering, the mortgage insurance would drop off at 12 months into the mortgage. But wait, $14,466 of that will have been applied to the principal over a five year period and they will have received approximately $6,898 in tax benefits for owning the home, coming to a net cost of $41,894. Assuming a 3% appreciation rate, their equity in the home at five years will be approximately $81,967. At seven years it will be around $103,257.
So what if they took that same $42,665 that was required as cash to close and invested in an asset accumulation account for 5 years at an average rate of 8%? At the end of five years they would have accumulated $63,564 and at the end of seven years, $74,554. Not a bad return on their investment. If they purchased their new house and opened an asset accumulation account, started with $100 while contributing $100 each month at an interest rate of 8%, they would have $7,497 at five years and $11,386 at 7 years.
Uh, not done yet. Time for the ah ha moment. If this wonderful couple stays in their rented home for 7 years, their Total Net Worth will reach $74,554. If they move forward and purchase their home, their home's equity after 7 years will be $103,257 and their asset account will be at $11,386, giving them a Total Net Worth of $114,643.
Total Net Worth after 7 years of renting: $74,554 Total Net Worth after 7 years of homeownership: $114,643
Total Net Worth after 7 years of renting: $74,554
Total Net Worth after 7 years of homeownership: $114,643
Now that you see the numbers, should they buy their first home?
Thanks for reading my Blog.
Take care,
Recently I had a new client inquire about consolidating their existing first and second mortgages. They were currently paying $2,277 per month for a combined mortgage balance of $227,691. Based on recent sales comps, the current loan-to-value was less than 75%, yet they were still paying private mortgage insurance! That’s $175 per month that is being wasted.
Because they were also interested in reducing the term of their mortgage, I prepared a Total Cost Analysis that included their current loan structure, a 30-, 20-, and 15-year fixed rate fixed term mortgage. While the 15-year mortgage had the lowest interest rate at 5.375%, the 30-year fixed rate mortgage gave them the most benefit and flexibility.
The monthly Net Savings by going with the 30-year fixed is $930 per month! The reason for such a dramatic drop in payment is because the client will no longer have that high-payment second mortgage that was amortized over a 5-year term and because they no longer have the $175 monthly mortgage insurance payment!
But what about reducing the term of their loan? After all, they did say they wanted to have a shorter term so they can reach their freedom point sooner.
Because the client has been comfortable with their current payment, they are able to continue with their current payment by applying the new found savings to their principal loan amount each month. This will save them over $165,000 in interest and reduce the term of their loan by 18.3 years! In other words, they will debt free in 11.7 years! Even better, the return on their investment for refinancing will be less than 7 months!
If you would like to schedule an appointment to see how you can increase your monthly cash flow, reduce the term of your mortgage, and/or reposition your equity, please call or email me. We'd love to help.
With high loan-to-value loans becoming more and more difficult to qualify for, there is still hope. Home Possible® and Home Possible Neighborhood Solution® are two great programs that offer financing up to 97%.
Why not go with FHA instead? While FHA is a great government program, the biggest reason is mortgage insurance. Take a look at the comparison provided below.
6%
12%
25%
16%
30%
18%
35%
*Exception: coverage levels shown not available for Manufactured Homes.
An example:
Mortgage Insurance Comparison
$107.31
$190.97
$83.66
That's just one reason to finance a home with this program. Call me today to find out more about the programs mentioned above.
I am providing a comparison between FHA and the Home Possible® products in order to show the overall savings that can be had.
As I was dropping my nephew off at school this morning, we looked over and saw that April Fool's Day was in full effect at Capital High School. To get the biggest bang for their "buck", they shrink wrapped a car located at the student drop off so everyone can appreciate the joke.
Wishing you all a great sense of humor, especially today!
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