The Federal Government's Homebuyer Tax Credit may have expired on April 30, but just because Uncle Sam has turned off the financial spigot aimed at housing doesn't mean home buyers still can't get "something extra" during their purchase. The keys for buyers today are how they negotiate and structure the terms of their offer.
While some terms can involve things like leaving the drapes and light fixtures, others involve money upfront and money over time. Depending on the amount of the purchase price and the loan, the amount homebuyers can save can be significantly more than the tax credit that just expired.
This month, YOU Magazine turns to national mortgage expert and consultant, Jim McMahan. McMahan is Director of Training and Education at LoanToolbox, the leading education provider to thousands of mortgage professionals across the country.
The Fed Checks Out
Both March and April of this year saw the ending of two important stimulus programs that were designed to benefit the housing market. In March, the Federal Reserve ended its program for purchasing Mortgage Backed Securities, which helped keep home loan rates low. April brought the end to the tax credit for home buyers. The tax credit was up to $8,000 for qualifying first time buyers and up to $6,500 for qualifying repeat purchasers.
Just because these programs have ended doesn't mean that home buyers can't seek credits from the seller to accomplish something similar. Successful investors will tell you that money is made when you buy something right with favorable terms, not just when it is sold.
What's More Important? Low Rates or Tax Credit
In a recent survey by Prudential Real Estate and Relocation Services, an overwhelming majority of those polled found that when factoring in either low interest rates or the tax credit, low rates were far more important in a decision to purchase a home now.
There's a good reason for this statistic. For example, if you purchase a home for $300,000 and finance $270,000, and your interest rate for a 30-year fixed rate loan was 5.25% versus 4.75%, you would pay nearly $30,000 more over the term of the loan. This is a significant amount of money!
Since the Fed's Mortgage Backed Securities purchase program ended on March 31, there has been much volatility and price swings in the markets. Rates overall are off their lows and are often quoted above 5.00% today with no points.
Looked at from another perspective, if prospective home buyers are waiting for home prices to decline a bit more before purchasing a home, but interest rates push higher towards 6.00% in the meantime, waiting could well cost those home buyers more money in the long run.
In fact, let's say a home buyer delays a transaction but receives a $10,000 reduction off that $300,000 home. If, in the meantime, rates were to rise .75% to 6.00% and the buyer financed 90% of the purchase price, the amount of total payments over a 30-year term would be over $35,000 more than paying the $300,000 purchase price and the 5.25% interest rate.
An Idea to Save Money Up Front and Over Time
When negotiating the sales price for a home, in many respects what the buyer is negotiating for is not only what the sales price of a home will be but also what the monthly payment will be. After all, unless someone is paying cash for the property, the terms consisting of the purchase price, the down payment, and interest rate on the mortgage will all factor in to what the monthly costs of the home will be for the buyer.
Many buyers focus on the sales price when negotiating and this is understandable. A home is typically the largest transaction home buyers have been involved with and the price paid factors in immensely on what it will cost them each month.
However, in negotiating the terms of the contract, a buyer can also negotiate to have the seller contribute money from the proceeds to allocate towards the buyer's closing costs. This money can be used towards either the reduction of cash required to close and/or a reduction in the interest rate on the mortgage.
Double Bonus by Seller Paying to Lower Rate
It's easy to see the benefits for buyers to have a lower interest rate on their mortgage. Even when compared to paying and financing less for a home, the accumulated costs when compared to financing a larger amount with a lower interest rate offer a buyer lower total costs over the time a mortgage is in effect.
However, one aspect of this situation not often considered is that the IRS treats points paid up front to lower a mortgage interest rate as pre-paid interest, regardless of who pays the fees. This means that when buyers negotiate to have the seller pay the costs to lower their interest rate, they receive the benefit of deducting them on their income taxes in the year the home is purchased.
If the costs to reduce the interest rate are 2.00% to obtain a lower interest rate, the $5,400 in this scenario, 2.00% of $270,000, would be deductible as pre-paid interest, netting additional money back to the buyer at tax time.
Time to Look at Your Options
Many guidelines have changed in the past few years, so the first thing home buyers should do is to seek a pre-approval from their mortgage professional in advance of writing an offer to purchase a home. In addition to determining exactly what home buyers can qualify for, pre-approval gives home buyers a stronger negotiating position since they will be perceived by the seller as a cash buyer.
In addition, home buyers who would like to investigate seller paid points as an option may find that they can purchase a little more expensive home.
