Jim Valentine on Real Estate
Interest rates are coming down but there is still a little hesitation among buyers wondering if and when they may drop further. This contributes to buyer indecision which can lock up buyers keeping them from making an offer and moving forward with their purchasing plans.
Sellers are successfully offsetting this with credits to buyers commonly known as “seller contribution.” They are often $10,000 – $12,000 and can be used to buy “points” in order to bring the interest rate on their loan down. Each point is 1 percent of the loan amount.
There are different types of rate buy downs ranging from short term, i.e., 1-3 year, or for the full life of the loan. The longer the term of the buy down the higher the cost to buy it.
One advantage to getting seller credit rather than asking for the price to be lowered by an equal amount is that you save your cash on hand for other things, i.e., property enhancement or remodeling after the close of escrow. You can pay the higher price that is in your loan over time while getting the tax benefit of deducting the interest that you pay on your primary residence on your income tax return.
If you anticipate a short hold, i.e., selling within three years, then you might be better off taking the lower price. You may have a higher interest rate, but it isn’t for long and you get more of a tax deduction to help offset the higher rate.
In the end you have a lower loan to pay off when you sell. A 30-year amortized loan will not be reduced by much in three years, but a $10,000 - $12,000 lower price will help you in this case. Another factor to consider is the PMI, the mortgage insurance cost.
If you have 20 percent or more equity, there is no insurance cost. You can use your savings to pay more down to get to a 20 percent equity position and use the seller’s contribution for closing costs that would otherwise have taken up much of your down payment money. This is a substantial savings as the PMI can be 1.5 percent of the loan amount.
Loan payments are based on the time value of money economic premise. Money sooner is worth more than money later. Your considerations for buying will all end up being based on this factor once you get past the price negotiations.
Do you want a 15-year or a 30-year amortization for your loan? Do you want to buy down the rate by paying money sooner, i.e., points at the time of funding. What is the opportunity cost of the money you keep on hand vs. putting into your real estate investment instead of financing that amount?
There are many ways to look at a real estate investment when you start to put it together and assess what is in your best interest. Bigger or smaller loan? How to use a seller contribution, or do you reduce the price in lieu of a seller contribution?
Your agent and lender will help guide you through this process by looking at your assorted options and how they are impacted by timelines that you may be able to predict or determine according to your personal plans. Be careful with your planning. Remember, “if you want to see God laugh, tell him your plan!” Things do change, so plan accordingly.
When it’s all said and done, your enjoyment of the property is the most important return you will get and should be considered at all times during the structuring, negotiating and consummation of the transaction.
When it comes to choosing professionals to assist you with your Real Estate needs… Experience is Priceless! Jim Valentine, RE/MAX Gold Carson Valley, 775-781-3704. dpwtigers@hotmail.com.