Cost of Not Buying a Home

This is something that was shared with us at our Keller Williams Realty - First Atlanta team meeting on Monday, October 15, 2007...I retyped it in order to share with all of you. I am constantly amazed at the wonderful training and resources that Keller Williams provides to its agents...do you receive the same? If you're interested in learning more about a career with Keller Williams or if you have questions related to real estate, contact me, carl@rkihomes.com

1) Rent Lost

Rent = $1,200/mo. The average person takes 30 days to buy. If you wait 6 months, you will pay your landlord $6,000.

2) Rate Change

If today's rate is 5.5% on a 30 year fixed rate mortgage, assuming a $200,000 sales price with 5% down: Your payment will be...$1,073 per month...

The following shows what happens to your payment if your rate goes up by the time you buy (in ½% increments)

This number you must look at from the long term picture. If you wait 6 months to buy a home, it is possible that the rates will be up .5%. The cost/loss to you IS NOT $60 per month. The cost is $60 per month times however many months you own the home. The average American owns a home 7 years, so that loss equals $5,040. If you keep this home as a rental property (a great idea especially for your first home and when rates are this low) then the loss is times 30 years, or $21,600. Of course if you look at it like a good financial planner would, your loss is not simply the $21,000 but it's that amount times the opportunity cost of lost interest had you invested that money yielding 5%-10% appreciation compounded annually. This of course multiplies the loss to 2 to 3 times the actual cash loss!

3) Appreciation Lost (Assuming a $200,000 sales price)

* Metro Atlanta typically appreciates at an average rate of 4%-5% per year. Atlanta was predicted to appreciate 24% over the next 5 years (CNN.com "Top 10 Places to buy - NOW")

4) Tax deduction/interest write off

This is the trickiest of the calculations because everybody's tax situation is different, and the tax code is a tad bit complicated. But as a general rule, you can write off 100% of the interest portion of your payment. And if you didn't know, the interest portion is MOST of the payment (for the first few years anyway)

For example: using the examples above, with a $1,073 per month payment ($190k loan @ 5.5%), the interest portion of the first payment is around $850 per month. So that's the write off that you will NOT be getting per month until you buy. Most people buying this price home are in the 28% tax bracket plus 6% state. That means the actual cash loss is the monthly payment times your tax bracket. Let's say 33%. So in this example, you are losing $280 per month CASH in tax deduction that you are not receiving. That's not even taking in to account that writing off $10,200 per year ($850 times 12 months) would probably take you in to a lower tax bracket; consequently, you would pay taxes at a lower rate. So...your "lack of deduction loss" is approximately, $250-$300 per month.

SUMMARY: IF YOU WAIT 6 MONTHS TO BUY, YOU ARE LOSING BETWEEN $8,000 AND $15,000 IN THAT TIME ALONE. IF YOU MISS TODAYS RATE, IT COULD COST ANOTHER $15,000 TO $100,000 MORE OVER THE LONG HAUL.

One Last Point: Affordability and Lifestyle

I do not recommend ANYONE BUYING A HOME that they can not afford, or that will make them "house-poor". I recommend that you should be fairly conservative. This means add up your PITI (total mortgage payment with taxes and insurance added in) and your payment should NOT be above 30% of your GROSS monthly income (before taxes).

Remember this though: If you "wait" to buy, that $200,000 home will most likely be $210,000 next year (5% appreciation). So the question you must ask is, "Is my income going up 5% per year?" If not then you will be able to afford LESS in a year than you can now.

* This is not intended as an earnings claim on purchasing rental property. Past results are not in indication of future performance. Please consult your tax advisor. (ask about the W-4 form).