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No Tax Credit? No Problem!

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Michelle Flaherty

Michelle Flaherty

By Michelle Flaherty

Has the incentive for first-time home buyers to break into the market just gone away?

My non-scientific market research has shown me that it has not.  My buyer clients are still excited about the house hunting process, low interest rates, and attractive offerings at low prices – and I’m hearing the same from my peers.

In fact, the drop in interest rates over the past two weeks has created a long-term incentive even more attractive than the first-time home buyer tax credit – and *bonus* – it’s not costing taxpayers a thing.

How does this work?  Consider the first-time home buyer using an FHA loan to purchase a $200,000 property.  For the first five months of 2010, when buyers were snatching up tax credits like hotcakes, the typical FHA interest rate was 5.25 percent.  Over the life of their loan, a buyer who locked in at 5.25 percent would pay a total of $412,621.13 in mortgage payments (including principle, interest, and PMI – not taxes or insurance).   Now, with the 4.5 percent FHA rate, that same buyer would pay a total of $380,994.95.

The post-tax credit buyer will save $31,626.18 with the better rate, or $23,626.18 better than they would have done by going under contract in April, closing by the newly-extended Sept. 30 deadline, and collecting the $8,000 tax credit.  The caveat, of course, is that their monthly savings only totals $87.85, so they would have to remain in their home for 7.6 years to collect $8,000 worth of savings.  But after that, they’re doing better every month!

Michelle Flaherty is an associate broker with Prudential Northeast Properties, serving Greater Portland, Maine. Visit her Web site at www.michelleflaherty.com.

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