People who buy condos tend to move more often than home buyers for a variety of reasons. People out grow their condos, get better jobs, graduate from school and have to move to another location. Many will buy a condo because they know they will be here for a shorter time and buying a condo makes more sense. I am often asked what the market will be like in 3-4 years and will I make money if I buy now rather than rent. I can only tell them the present trends. I would only be guessing as to what the market will look like in the future. I can give buyers and sellers a view of the past and the present market trends for condos.
One thing I can tell them is that may not have factored into the purchase equation is the financial benefits of owning for several years. You may or may not have appreciation on the sales price but you will get two other large financial benefits. At the low rates that we currently have, the “plus” factors are even better. Lets use $200,00 as a loan amount to see how it works. Lets use a $250,000 sales price.
Paying down the Principal
Your monthly note is broken down into several large numbers once you take out taxes and the HO6 Insurance policy. Over a four-year period you will pay down the principal by $13,819.64 at a 4.5% rate. That is an average of $287.97 per month that you are decreasing the amount you owe. When you sell, you will get this back as equity that has built up over time.
You can get lower rates if you finance for 5 years or 7 years amortized over 30 years. You just have to pay off the mortgage in 5 or 7 years. The pay down of principal increases monthly. Going from 263.37 in month One to $314.03 in month 48.
The Mortgage Interest Deduction
The interest you pay over the 48 months is $34,819.12. This is the cost to borrow the money. As a home owner you get to deduct the interest you pay on your taxes. If you are in the 25% tax bracket your deduction is 25% of $34,819.12 or $8407.78. This how much you save on taxes over the 48 months. You save $8407.78. The out-of-pocket expense is thus lowered by an average of 181.35 per month over the 4 years.
The Appreciation Factor
This is what we do not know because we cannot see the future. Lets just say if the property appreciates by 5% over the 4 years. This is big money. This has done this in the past and could do it in the future. Last year alone you condo could have easily appreciated 10%. This figure is based on the sales price. Let say you paid $250,000. The 5% increase would put you at an increase of $12,500 over the 4 years. This number is not certain. Over the last 10 years we have seen 6 years of appreciation and 4 down or stable years. The down years were 2008-2009. The even years were 2010 and 2011.
Adding the Number Up
Paying down the principal and getting the Mortgage Interest deduction is a given and are known factors. If you get the 5% appreciation then it really adds up in your favor. That all adds up to……
That adds up to almost a thousand dollars per month. You will have expenses as well but you can easily pay $1500 per month or $72,000 in rent over the 4 year period. You never see this again. This is an especially valuable set of number of you are a student, medical student or resident when you know how long your stay in New Orleans is going to be…..