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"I Will Renew My Lease For Another Year"
- And this could be a very expensive mistake.
Although the idea sounds romantic and it could just happen; when you take a closer look at the logistics, you
may end up losing much more than what you thought you could save.
Here is why:
1. Intereste rates.
They are at a record braking low, the lowest for over 20 years! Historically, they have been around 8 - 81/2%.
Courtesy of the distressed economy and Barack Obama, you can get a loan putting only 3.5% down at around
5%. Use the payment calculator, and do your purchase price first at around 5%, and then at 6.5% (6.5% is the
forecast for 2011. Now see the difference in the payment.
2. Property values:
It is my opinion they are also at the bottom. All real estate predictions for 2012 indicate a 5% to 6% increase in
value. Although there is no certainty as to the future, I can tell you that the inventory has been declining month
after month. In January 2008 there were 19,500 single family homes for sale in the Broward County market.
January 2009 there were at 12,000 and May 2010 there are a total of 7,500 homes. However, if you exclude the
short sales and foreclosures, you end up with 4,500 homes!!! This is the same inventory level as the year
2004!!! Prices are based on supply and demand. The supply has been declining, and the demand has been
increasing.
3. Closing Costs:
Because is a buyer's market, last year I was able to negotiate to have the seller to pay ALL you closing costs,
which are 6% of the purchase price. Today, 1 in 5 sellers will do this, and about half will credit half of the closing
costs. If the market changes more, (which it seems to be doing that as we speak) you may have to pay all of your
own closing costs. Keep in mind that when the market was hot, it was very difficult/almost impossible to get any
Seller to pay any of your closing costs due to appraisal issues.
So here comes the comparison:
Assume you save an additional $20,000.00 to use for the down payment. Assume interest rates would then be
6.5% (they were a little lower than 6.5% not too long ago) Property value goes up 10% from today's prices. And
assume that in most cases, Seller can still pay 3% of your closing costs, instead of 6%. Assume a $200,000.00
purchase.
BUYING 1 YEAR FROM NOW:
Payment at 6.5% paying $220K with $2,000.00 in taxes and no HOA is $1,623.70 (everything included). But you
put $20K down, so your payment is now $1,491.24. Seller pays 3% of your closing costs ($6,600.00), and your
total cash to close is 6.5% + give or take $1,000.00 = $14,300.00.
BUYING NOW:
Payment at 4.875% paying $200K with $2,000.00 in taxes and no HOA is $1,289.25. Seller pay ALL your closing
costs (6%), and the total cash you need to close is 3.5% down + give or take $1,000.00 = $8,500.00
If the above holds true, you would pay an additional $201.99 for 30 years ($72,716.40), it will cost you $5,800.00
extra in closing costs, and you will lose the $8,000.00 from Uncle Sam. In conclusion, your total loss would be
$13,800.00 out of pocket, plus $72,716.40 prorated over 30 years, plus the $20,000.00 you saved.
If you are thinking about buying, now is not the time.
- And this could be a very expensive mistake.
- "I will save more money for the down payment, payoff the debt, and I will buy then."
- "If I don’t find something I like by such and such a date, I will rent for another year."
- "I will keep on renting until I can buy an X bedroom home for X$. The market is still going down."
Although the idea sounds romantic and it could just happen; when you take a closer look at the logistics, you
may end up losing much more than what you thought you could save.
Here is why:
1. Intereste rates.
They are at a record braking low, the lowest for over 20 years! Historically, they have been around 8 - 81/2%.
Courtesy of the distressed economy and Barack Obama, you can get a loan putting only 3.5% down at around
5%. Use the payment calculator, and do your purchase price first at around 5%, and then at 6.5% (6.5% is the
forecast for 2011. Now see the difference in the payment.
2. Property values:
It is my opinion they are also at the bottom. All real estate predictions for 2012 indicate a 5% to 6% increase in
value. Although there is no certainty as to the future, I can tell you that the inventory has been declining month
after month. In January 2008 there were 19,500 single family homes for sale in the Broward County market.
January 2009 there were at 12,000 and May 2010 there are a total of 7,500 homes. However, if you exclude the
short sales and foreclosures, you end up with 4,500 homes!!! This is the same inventory level as the year
2004!!! Prices are based on supply and demand. The supply has been declining, and the demand has been
increasing.
3. Closing Costs:
Because is a buyer's market, last year I was able to negotiate to have the seller to pay ALL you closing costs,
which are 6% of the purchase price. Today, 1 in 5 sellers will do this, and about half will credit half of the closing
costs. If the market changes more, (which it seems to be doing that as we speak) you may have to pay all of your
own closing costs. Keep in mind that when the market was hot, it was very difficult/almost impossible to get any
Seller to pay any of your closing costs due to appraisal issues.
So here comes the comparison:
Assume you save an additional $20,000.00 to use for the down payment. Assume interest rates would then be
6.5% (they were a little lower than 6.5% not too long ago) Property value goes up 10% from today's prices. And
assume that in most cases, Seller can still pay 3% of your closing costs, instead of 6%. Assume a $200,000.00
purchase.
BUYING 1 YEAR FROM NOW:
Payment at 6.5% paying $220K with $2,000.00 in taxes and no HOA is $1,623.70 (everything included). But you
put $20K down, so your payment is now $1,491.24. Seller pays 3% of your closing costs ($6,600.00), and your
total cash to close is 6.5% + give or take $1,000.00 = $14,300.00.
BUYING NOW:
Payment at 4.875% paying $200K with $2,000.00 in taxes and no HOA is $1,289.25. Seller pay ALL your closing
costs (6%), and the total cash you need to close is 3.5% down + give or take $1,000.00 = $8,500.00
If the above holds true, you would pay an additional $201.99 for 30 years ($72,716.40), it will cost you $5,800.00
extra in closing costs, and you will lose the $8,000.00 from Uncle Sam. In conclusion, your total loss would be
$13,800.00 out of pocket, plus $72,716.40 prorated over 30 years, plus the $20,000.00 you saved.
If you are thinking about buying, now is not the time.
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