Many potential homeowners know that buying a home is truly the best way to create wealth for their future. What they may not know, is that earlier is always better. This worksheet explains what the cost of waiting just 1 year to buy a home will mean in terms of missed out savings and opportunity. Remember, if you’re considering buying a home… the sooner, the better.
LET’S TAKE A LOOK AT THIS SCENARIO
John and Pamela are considering buying a home today rather than rent for a year. While Pamela
is ready to buy now, John is hesitant, and he’s considering renting another year to save a little more money. They have set aside a budget today to purchase a $400K. ($20K down payment). Let’s see the amount of money this couple would miss out on by waiting one year …
APPRECIATION – $24,000
Home purchase price: $400K
Average annual appreciation: 6%
400K (400K x 6%) = $24K (equity)
PRINCIPAL PAYDOWN – $8,000
Paying down your mortgage is a forced savings account. 30 year fixed loan Interest rate: 3.5%
Total principal paydown = $8K
RENTING FOR 1 YEAR – $24,000
Renting at its core, is paying someone else’s mortgage. Monthly rent: $2K (this is on the low side … )
$2K x 12 mo. = $24K
BUT WAIT, THERE’S MORE …
RISING INTEREST RATES – $18,396
$18,396
Interest rates can’t remain low forever. A 1 % increase will cost you thousands. Let’s say interest rates go up the following year by 1 to 4.5%, making the payment difference $219/mo. The couple plans on staying in their new home for 7 years (avg).
84 months x 219/mo. = $18,396
DEDUCTIBLE INTEREST – $5,432
One of the best parts about owning a home is that the interest you pay is tax deductible. Let’s see how this benefits Pamela and John: At 3.5% interest in year 1, the couple will pay $16,975. Let’s say John and Pamela have a total income of $120K, putting them in the 32% tax bracket.
By owning a home, their taxable income drops to $103,025. Lowering their tax bill from $38,400 to $32,968.
THE COST OF WAITING – $79,828
After taxes, Pamela and John take home net $81,600 a year.
By waiting 1 year, they essentially have worked that last year for free?!