The Real Dollars And Cents Cost of Waiting to Buy

As most of you know, I either attend or speak at many national events. While out and about, I receive a lot of real estate questions like, “how is the market?” or “what are home prices doing?” I enjoy receiving these questions in that I love talking real estate any chance I get. While these are good questions and I enjoy giving my interpretations of the market, what concerns me are the questions that are not being asked; questions that I deem are those we probably want to be asking. Examples of such questions are “I heard the FHA guidelines are changing, what does that mean?” or “Tell me more about the tax credit and when does it expire?” Or, “If I am thinking of selling my Austin house this year, is there a better time to sell?”So, since such questions are not being asked in my day-to-day conversations, I thought I would ask them for my readers – because I think the answers to them is information many of us really want to know.Q: I hear that FHA guidelines are changing. Is this true? And if so, what does this mean? A: Yes, FHA has recently announced many changes to their loan programs.

• First, FHA is increasing the up-front financed mortgage insurance premium (MIP). The current MIP is 1.75% and is proposed to increase to 2.25%. This means for every $100,000 loan, it will cost you an additional $250 +/- in up-front premium charged. UPDATE 03/28/10: FHA is officially increasing MIP on Friday April 3rd. The new MIP will be in effect on Monday, April 5th.
• Second, FHA is changing the seller concessions from 6% to 3%. This means that, on a $100,000 loan, a seller would only be allowed to pay up to $3,000 of your closing costs. Currently, a seller can contribute up to $6,000, which is enough to cover most of the closing costs and prepaids necessary to obtain the maximum FHA loan.

Q: Will it really make much difference if I wait or don’t take advantage of the tax credit? We have said this before, but if you are considering buying an Austin home in 2010, it makes prudent financial sense to take advantage of the incentives that are time sensitive. The pragmatic reasons follow:

1. If you will take advantage of FHA financing (loan amounts up to $288,750), waiting will only cost you more money. As I mentioned before, the cost of FHA financing, due to the national delinquencies, is increasing.
2. If you are a First-time Homebuyer, you have until April 30^th to take advantage of <up to> a $8,000 tax credit. That is $8,000 that will NOT be available to you after May 1! Learn more about the tax credit.
3. If you are a Move-up Homebuyer, you have until April 30^th to take advantage of <up to> a $6,500 tax credit. That is $6,500 that will NOT be available to you after May 1! Learn more about the tax credit.
4. Interest rates have been highly favorable because the Fed is buying mortgage-backed securities, which is keeping interest rates artificially low. The authority to buy these securities is reported to end in April. This means that Interest Rates will most probably increase once the Fed quits printing $trillions in cash to help the housing market.

So by waiting, what could it mean? To make the numbers real, let’s produce a few likely scenarios:

Scenario	Buy Now	Buy Later	Cost of Waiting
Scenario 1: First Time Homebuyer FHA Loan
Home Price	$250,000	$250,000	$0
Down Payment 3.5%	$8,750	$8,750	$0
FHA loan amount (includes up-front MIP)	$245,471	$246,670	+$1,207
Max seller paid concessions	6%	3%	-3%
*Closing Costs	Zero <seller pays all>	$750 <seller can only pay $7,500>	+$750
Tax Credit	$8,000	$0	-$8,000
** Interest Rate	5.25%	7.25%	+2%
Total out of pocket	$750	$9,500	+$8,750
Total monthly payment:	$2,001	$2,333	+$332/month
Scenario 2: Move-up Homebuyer Conventional Loan
Home Price	$250,000	$250,000	$0
5% down	$12,500	$12,500	$0
Loan Amount	$237,500	$237,500	$0
Tax Credit	$6,500	$0	-$6,500
** Interest Rate	5.25%	7.25%	+2%
Total out of pocket	$12,600	$19,100	+$6,500
Total payment	$2,037	$2,346	+$309/month

* Closing Costs guestimated to this amount ** We have no idea how high Interest Rates will jump – we simply took a more historical Interest Rate to make our ‘what if’ calculationQ: Based on the graphs, what would it cost to wait?

• Scenario 1: costs an extra $8,750 out of pocket plus an extra $332/month
• Scenario 2: costs an extra $6,500 out of pocket plus an extra $309/month

Q: But these incentives are for buyers only; why do I care as a seller?In many of my conversations of late, people are talking about waiting until the Spring or Summer to sell. However, by then the buyer incentives (tax credits) will be gone, financing will be more difficult and if interest rates rise the cost of buying increases. What do you think this will do to the pool of buyers in the market available to buy your home? Enough said?At the GoodLife Team, our advice to both buyers and sellers is to learn what the REAL market conditions are and what they mean to you in terms of your dollars and cents. And, after understanding the current real estate marketplace, then make a prudent decision that matches your goals. Don’t get caught up in the media hype and don’t listen to what others are saying that are likely to not really know what they are talking about. Get informed, make good decisions. In other words, ask good questions of your real estate professional and lender.Let me know your thoughts!Krisstina