Are You Better Off Buying A Home Now Than With The Tax Credit?
Are you better off buying a home now with lower interest rates than you would have been with the $8000 tax credit?
Real estate activity slowed down in Northern Virginia and across the nation when the home buyer tax credits expired. The following charts display the Market Action index for Fairfax and Arlington VA real estate. You’ll notice that momentum for real estate activity started to taper off after the tax credit expired on April 30, 2010.
What makes me curious about this situation is why potential home buyers would be more motivated by the tax credit than the current interest rates, which are scraping 4.5 percent on a 30 year fixed rate mortgage for some home buyers. Check out the following scenarios.
Scenario A) Let’s say you are in the 
market for a $500,000 home in Northern Virginia that you plan to put a 20 percent down-payment on and can obtain a fixed interest rate of 4.5 percent. Your mortgage payments will be $2,027 per month.
Scenario B) Let’s consider the same scenario but rewind in time a few months when the tax incentive was still available. The difference is that your interest rate is 5.25%. Your mortgage payments will be $2,209 per month. The payment is $182 higher, but you are able to receive an $8000 tax credit because you qualify as a first time home buyer.
Comparing these two examples, it would take about 3 years and 7 month for ‘scenario A’ to make up the $8000 advantage received by ‘scenario B’ because of the tax incentive. Everything after 3 years and 7 months is “frosting on the cake” for the home buyer in scenario A.
I am not a tax adviser, but from the way I interpret the home buyer tax credit, the home has to remain your principal residence for a minimum of 36 months from the date of purchase. If this requirement is not met, the full amount of the credit received becomes due on the return for the year the home ceased being your principal residence.
Therefore, unless you plan on selling between the 36th and the 43rd month of home ownership, then you are better off buying today then you would have been at a higher interest rate, while the tax credit was available.
Because there were so many home buyers in the market at the end of 2009 and beginning of 2010, competition was higher for homes. In today’s market, with less buyer activity, you are going to have more leverage as a buyer to negotiate agreeable terms.
In summary, don’t be too disappointed about missing out on the tax credit. There are plenty of reasons to be optimistic about being a buyer today.
This is a great place to start your search for homes in Northern VA and DC.
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[...] a 30 year fixed rate mortgage as low as 4.5%. I wrote a blog yesterday that demonstrated how some buyers are in a better position when buying today than they would have been while the tax credit was still [...]