Mortgage Rate News

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The first time home buyer tax credit has been extended — and expanded. The $8,000 credit has been extended by six months, and there has been an expansion to include current home owners who want to buy. Current home owners can get a $6,500 tax credit when they look for a new home. This is along the lines of the tentative agreement reached last week. Bible Money Matters offers a great summary of the main points for the new $6,500 tax credit:

• The credit is available for homes that go under contract by April 30, 2010 and close by June 30th, 2010.
• Current homeowners can claim a $6,500 credit as long as the property they are vacating has been their primary residence for at least five consecutive years out of the last eight years.
• Income limits: $125,000 a year for individuals, $225,000 a year for married couples. (these are higher limits than before)
• Homes that cost more than $800,000 aren’t eligible for the credit.
• $6500 tax credit is not retroactive.  (from the language of the bill: “shall apply to residences purchased after the date of the enactment of this Act.”)

Sadly, I don’t qualify. Which is okay, I suppose. We weren’t planning on moving any time soon, so it’s not like we would use it anyway. But it would still be nice to know that if we wanted to take advantage of such a great deal, we could. It’s not $15,000, but it’ll do. It’s better than nothing.

However, the tax credit extension is also expected to help keep home prices higher. The Wall Street Journal reports on the first time home buyer tax credit and its results:

Goldman Sachs estimates that the credit resulted in 200,000 sales this year, but that many of those sales were front-loaded—driven by a surge in sales shortly after the tax credit took effect. The simple extension “should result in fewer incremental first time purchases than the first round of the credit did,” writes Goldman economist Alec Phillips.

While the tax credit won’t reduce excess inventory, the incentives could keep prices up because “potential sellers are likely to incorporate a fraction of the credit amount in their sale price—with the knowledge that the majority of buyers will qualify for either the first time or move-up credit,” writes Mr. Phillips.

One of the things that the mortgage lender looked at when I was applying for my home loan was whether or not I had money in my retirement account. We have a Roth IRA, and that was money that the mortgage lender considered as “available” for a down payment. We didn’t use it, but there are many people who feel that using money from their Roth IRAs is a good idea. After all, there are no penalties if you withdraw money from a Roth IRA for use to buy a home. And, with the current market showing many people losses in their retirement accounts, many of them feel that perhaps “investing” in real estate might be the way to go.

However, it may not be the best course of action after all. Usamy News offers this insight into using a Roth IRA to fund a down payment for a home:

But don’t forget, the stock market is way down as well. And investments in equities and mutual funds are just as likely to show strong increases as real estate, once the economy recovers. Your money will likely earn a better return staying in your Roth IRA than it would investing it in a home - over the past 22 years, existing home prices appreciated an average of 3.4 percent a year, according to the Case-Shilling Index, while the “ballpark” figure for returns on an IRA is 8 percent a year - so financially, your deposit money is likely to appreciate faster by leaving it in a Roth.

In the end, taking money out of your retirement account is rarely a good idea, even if you are doing something important like buying a home. This is because you miss out on the earnings that you could be receiving. Even if you pay the money back eventually, you may find that you are growing your account slower with the missing principal.

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The recent housing market problems have led to a situation where home values have fallen far enough in some areas that it just doesn’t make sense to rent. While it still costs a little less to rent in some places, the difference is small enough that you might as well buy and capitalize on the mortgage rate tax deduction and the possibility of appreciation when the housing market picks up. In the top two real estate markets on the following list, though, it actually costs less money than it does to rent. Here is the list, from BusinessWeek, of real estate markets that offer great buying opportunities right now:

1. Detroit Metro, MI
2. Pittsburgh Metro, PA
3. Rochester Metro, NY
4. Memphis Metro, TN (also MS and AK)
5. Tampa Metro, FL
6. Cleveland Metro, TN (apparently the OH side isn’t that great)
7. Dayton Metro, OH
8. Columbia Metro, SC
9. Orlando Metro, FL
10. Dallas-Forth Worth Metro, TX
11. Las Vegas Metro, NV
12. Riverside Metro, CA
13. Providence Metr, RI (also MA)
14. Miami-Fort Lauderdale Metro, FL
15. Little Rock Metro, AK
16. Atlanta Metro, GA
17. Jacksonville Metro, NC
18. Boston Metro, MA
19. St. Louis Metro, MO (also IL)
20. Minneapolis-St. Paul Metro, MN (also WI)

Of course, you have to be moving to these areas to make it work for a primary residence, and who knows whether you have available jobs there. For example, Detroit has the highest unemployment in the country. How can you get even a cheap house if you can’t find a job?

Of course, if you are looking to buy as an investment, renting it out for cheap and then hoping to sell it on the recovery, it might be worth it. But it can be difficult to manage investment property from a distance if you don’t have a management company to help you out. In the end, it’s about what you think will work best.

However, if you are planning to buy sometime soon, you can find good deal almost anywhere — not just in these metro areas that have been the hardest hit.