Background: You bought a home in 2005 for $175,000. You put 20% down or $35,000 and you paid $5,250 or 3% in closing costs. You got a mortgage in 2005 at 6.5%, 30 year fixed with an original principle of $140,500. Your current mortgage principle is roughly $131,000 and you have a monthly payment of $888, not including taxes and insurance.
Sell Low, Buy Low
You decide to sell your home to take advantage of the current market; I have done a market analysis and have determined that we can sell your home for $165,000. Of course you have great objection because you believe that real estate should always appreciate and don't want to take a loss before you have even included the costs for selling. However, you ask me to provide a net to seller sheet. The cost of selling your home, including title fees and commissions is 13,200 or roughly 8% of the sales price. The net to seller is calculated to $151,800 or you will receive $20,800 at closing.
The behavioral economics feeding your ego says that you invested $35,000 and are only getting back $20,800. A loss of $14,200. The logical approach should tell you that your rent for your house was $237/mos and you wrote off over $40K in interest on your taxes.
You have identified a property you like at $200,000. The seller pays all closing costs. Again, you put down 20% or $40,000 and get a 30 year fixed mortgage at today's great rate of 5% with the stating principle of $160,000. Your monthly principle and interest payment would be $858. Wow, that's less then my current mortgage.
Sell High, Buy High
You decide that there is no way I am going to take a hit on the loss and wait 3 years until I can sell my property for $200,000. We'll just say that your home appreciated by 14.3%. The cost of selling your home at 8% is now $16,000. Your principle on your loan is now $124,500. Your net is now $184,000 or $59,500 cash at closing.
The property you liked at $200,000 is now selling for $228,600. The seller pays all closing costs. Again, you put down 20% or $45,750 and get a 30 year fixed mortgage at a future rate that will be higher but we will say conservatively at 6.5% with the stating principle of $182,850. Your monthly principle and interest payment would be $1,155.
Analysis
Sell Low, Buy Low
Here's what I didn't include in the loss. You receive the tax credit of $6,500, so the actual loss is now $7,700, giving you $28,500 cash at closing. After closing on your new house you will need to bring an additional $11,500. We know the interest rates are low, so we know that you are now making a total home investment of $46,500 on current interest rate of 5%. Assuming you carry the 30 year note to term, you will be paying a total interest of $149,210. Your monthly P&I is $858.
Sell High, Buy High
You sell in 3 years, however there is not longer the tax credit. You decide to put all the proceeds from home into the down payment. This would make the current note $169,100. Note that your principle is still almost $10,000 higher then if you would have bought low, but you did net almost $14K more then the buy low scenario. However, it is fair to say that interest rates will not stay this low for much longer, they are already creeping up. We used the 2005 rate as a conservative rate, but even in this scenario, your principle is already higher then if you would've bought low. With the rate at 6.5%, and you carry the note to term; you will pay a total interest of $215,678. Your monthly payment will be $1,069
Difference in…
Interest: $66,468
Monthly Payment: $211 or $2,532 annually.