Why The Tax Credit For First Time Home Buyers May Be A Bad Deal For You.
Posted: December 27th, 2009 | Author: Joe | Filed under: Economy | Tags: Debt, home buyer credit, Home Buying, Mortgages, tax credit | 5 Comments »Many people who have been waiting to trade up to a bigger house have used the $6,500 homebuyer tax credit as a reason to finally make the move, but that may not be the best idea.
On the surface, it seems like a perfect time to buy a new home – Despite a recent rise, mortgage rates are still historically low, and you could qualify for a $6,500 tax credit.
You’d be crazy not to buy a bigger house, right?
Well, that’s the conventional wisdom, and sometimes conventional wisdom is little more than herd mentality.
In reality, the tax credit is little more than an artificial stimulus meant to prop up a deflating housing bubble. You can argue whether it’s the right thing to do for the country, but it’s probably not the right thing to do for your finances – unless you really need to buy a bigger or new house anyway.
In fact, making do with the limitations of your current home is one of the smartest ways of staying out of debt and saving money, says Deborah Knuckey, author of “Conscious Spending for Couples” and a real estate agent based in Bethesda, Md.
Essentially, the tax credit is a nice bonus if you were already going to buy a home, but it simply doesn’t offset the cost of buying a home, or upgrading to a bigger home.
People who trade up to more expensive homes can spend a whopping 10 percent of the value of the new home in transaction costs and taxes, not to mention moving costs, Knuckey says.
Moving from a $300,000 house to a $500,000 house will cost you $50,000, Knuckey says.
And then there’s the hidden costs many people don’t think about. Some of these costs are insurance, school and property taxes, new furnishings, and energy bills. And perhaps the biggest cost factor is the one almost no one every talks about: when you buy a new home, you’re starting the clock again on your mortgage payments.
This means that if you were 10 years in on your previous 30 year mortgage, buying a new home with a 30-year fixed rate mortgage will set you back to zero on the payment timeline, which means more of your money will go toward interest payments, and it will take you longer to actually own your home.
I’m not sure if I agree with what you’re saying. It is true that this may impact the real estate market negatively, but isn’t this a way for governments to stimulate the economy?
Great way for home buyers to get into a home. I think this is wonderful.
Great article, I wasn’t aware a tax credit was being offered.
Great advise. Use whatever to get into a home!
Barry,
The government can only stimulate the economy in the short term. It can provide stability when things get too bad, but it is not true economic growth. That’s what too many people (even in the media) forget.
The reason home sales increased over the past quarter is not because unemployment dropped, and people had real wage growth or because the economy grew – it was because they were receiving a temporary payment to buy a home.
It’s not going to help them afford to live in that home, and it’s not going to be an incentive for other people to buy a home once the tax credit expires.