Should You Buy a Home Before Year-End? 4 Reasons to Consider Taking the Plunge
With the dog days of summer behind us, the real estate market should soon be experiencing an end-of-season cool-down. But that doesn’t mean prospective homebuyers should cool off, as well.
If you’ve been thinking about buying a home, taking the plunge before year-end could save you money, give you extra negotiating power and potentially even increase your future take-home pay. Here are three things that make the fourth quarter of 2015 a great time to buy a home.
Low interest rates
After months of rumblings about raising the federal funds rate – a key benchmark used to set mortgage interest rates – the Federal Reserve decided to keep rates at record lows during its September meeting. However, analysts believe the Fed will begin the rate “liftoff” soon – perhaps even as early as their next meeting in December. Expectations are that rates will be raised gradually, but even an extra half point can make a big difference in monthly payments as well as the lifetime cost of a mortgage loan.
For example, for a $1 million fixed rate loan at 4.5%, monthly payments are $5,067 and the total cost of the loan over 30 years would be $1,824,120. At a 5% interest rate, the monthly payment goes up by more than $300 to $5,368, and the cost of the loan over 30 years increases just over $108,000 to $1,932,480.
Real estate sales tend to slow down during the fourth quarter for a variety of reasons – people get busy with the school year and the holidays, and inclement weather keeps people from venturing out to look at homes. But for some hot housing markets, this winter may be a slower season than they’ve seen in a while. Trulia Housing Economist Ralph McLaughlin says that after several years of tight inventory and large price gains, certain fast-moving markets like Seattle, Denver, Salt Lake City and the San Francisco Bay Area are finally showing signs of a slowdown.
This market moderation, which can result in a lack of competing bids for choice properties, can put you in a strong negotiating position, especially if you have been preapproved by your lender. Your position is strengthened further when motivated sellers are looking for a quick sale to downsize, move for a new job or access built-up equity. Under the right circumstances, as the “only game in town”, you may be able to shave thousands of dollars off the listed price and/or negotiate concessions that can lower your closing costs.
Buying a home comes with a variety of tax benefits, the biggest being the ability to deduct interest paid on the mortgage. Of course, to maximize tax deductions it’s best to buy earlier in the year, but the sooner you’re paying interest on that new home, the more interest you’ll be able to deduct come next April.
One of the immediate benefits, especially if you’ll be deducting mortgage interest for the first time, is that you may be able to reduce the amount of federal income tax withheld from your income – resulting in a higher paycheck each month. Property taxes (also known as real estate taxes) and some closing costs are also tax deductible. It’s always a good idea to consult with a tax professional to determine how these deductions could affect your bottom line.
Low Down Payment Options
For many years, 20% has been considered the magic number for a mortgage down payment – anything less could end up costing you in the form of expensive private mortgage insurance (PMI). Fortunately, today there are lenders out there who offer less than 20% down payment options without PMI. It’s important to consider how adjusting your down payment will affect your interest rate (generally the less you put down, the higher your rate will be), but if getting into a home quickly is your priority, a low down payment can facilitate that goal.
If not now, when?
A slow fourth quarter for real estate could be just the right speed to get you into your new home. Consider taking advantage of an environment that combines four big advantages: historically low borrowing rates, reduced buy-side competition, the tax benefits of home ownership and inexpensive low down payment options.