How to Apply “Free Money” Wisely Toward a Home Purchase?
In my previous blog, “Stimulus Package – What It Means to Bay Area Homebuyers”, some prospective homebuyers and comments have expressed that the $8,000 tax credit in the Stimulus Package is “just not enough” to stimulate them to get off the fence. Understandably, the incentive seems too insignificant when we are talking about an average housing price of $500,000 in the Bay Area.
On the flip side of the coin, $8,000 is unarguably a substantial amount of money – don’t we all wish to have an extra $8,000 in our bank account? Since a tax credit is a dollar for dollar reduction in income taxes (e.g. if you have $8,000 tax credit, you will pay $8,000 less tax that year regardless of your tax bracket), it is essentially like “free money”. Therefore, for someone who intends to purchase a home this year, there could be a number of ways in which this money can be wisely applied toward the purchase. Here are some examples:
1. Down payment – Many buyers have admitted that coming up with enough down payment is the toughest part. Nowadays, in order to get a loan from most conventional lenders, a buyer has to put at least 20% down. For example, a $400,000 home, the down payment would be $80,000. $8,000 would subsidize 10% of the down payments. For FHA loans, when the minimum down payment requirement is 3.5%, $8,000 can cover a large portion of it.
2. Closing costs – There are closing costs associated with every transaction. A buyer’s closing costs may be anywhere from 1%-3% of the purchase price. For a $500,000 home, the costs would be $5,000-$15,000. $8,000 would pay for, if not all, a substantial amount of the closing costs.
3. Points Buy-down – Interest rate can be reduced by buying down the points. For example, if the loan amount is $400,000, the mortgage payment is $2,334 per month at 5.75%. Pay 2 points (equivalent of $8,000) to buy down the interest rate, a buyer may save about $200 a month; that is, a saving of $2,400 per year. If the property is held for 10 years, total saving is $24,000.
4. Property tax – Annual property tax is about 1.2% of the home value. Deriving this mathematically, $8,000 covers one full year of property tax for a $650,000 home or two-years for a $350,000 home.
5. HOA fee – For people who are looking into townhomes or condos, the HOA fee runs about $300 a month on average. By calculation, $8,000 covers over 2 years of HOA fee.
6. Renovations – Most new homeowners would be inclined update or remodel parts of the house. Depending on the extent of the renovation, $8,000 may serve very well to give a kitchen or a bathroom a good facelift.
In a nutshell, the tax credit in the Stimulus Package may not appear to be as attractive to some prospective Bay Area homebuyers at first. But for those who are willing, able, and ready to become homeowners in 2009, it definitely offers a better financial advantage.
Just a reminder: the $8K no-repayment tax credit applies to those who purchase home between January 1 and December 1, 2009. Carefully planning the timing of the closing could be worth thousands of dollars.
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5 Responses to “How to Apply “Free Money” Wisely Toward a Home Purchase?”
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Annie, great post and suggestions. Low interest rates, prices that lower monthly payments hundreds of dollars from just 2-3 years ago, and now an $8,000 tax credit, most families that qualify for a new home loan in the Bay Area are in a 25-35% tax bracket, when taken into consideration, that actually means the $8,000 credit can be as much as $12-14,000 before paying taxes on the money, and as you mentioned there are no taxes to be paid.
Sounds like when one considers all the perks there may never be an opportunity like this again. If you are purchasing a home to live in, enjoy, raise a family, have ties to the community, and no landlord, Today just might be looked back upon as the Opportunity of a Lifetime
Annie,
Thanks for the informative post.
This is a wonderful opportunity for first time buyers or those who have not owned in the three years prior to purchase.
The window of opportunity will be short!
Brian
Annie,
Wonderfully presented inormation on the stimulas package!
Larry
Annie, You are a great blog writer and I love reading oyur posts. You explained this tax credit so that eveyone can understand it batter and hopefully take advantage and see the benefits!
Great Post Annie,
I like how you broke down into sections how the $8,000 could be used to pay different things. Now is a wonderful opportunity for people to purchase a home.