Everyone wants to own a home. But if you don’t BUY RIGHT Home ownership can be blinding!!! I don’t know WHO advised the buyer of this deal recently. Take a closer look at the deal points:
3 Bedrooms, 2 bathrooms, purchased recently for $500K. The median house price for this zip code is $450K. This house is not remodeled and has an ugly old kitchen. Good bones, but there is nothing new about the house. Another words this house is already over median.
The buyer put down 5%. Financed the balance so they now owe PMI (personal mortgage insurance). Property tax will be 1% of purchase price in LA, so $5000 per year with 2% increases annually.
Since the borrower opted for a 30 year mortgage and put a minimum down payment into the deal, they were assessed an additional 0.85% charge. The APR of 3.13% with the assessed addition is now 3.98%. This all looks great, right?
The buyer believes the house will appreciate 5% for the next 3 years, to $578.8K. That’ a whopping $78K PROFIT RIGHT??? WATCH THIS:
Borrowed Amount: $475K
Interest to be Paid in 3 Years: $55.2K
Property Tax to be paid in 3 Years: $15.3K
Property Insurance to be paid in 3 Years: $1K
Total Paid by Buyer in 3 Years: $71K
The buyer after 3 years has put $571K into the house, even though they paid down part of the loan, they have still effectively PAID $571K. How much profit? $7.8K hopefully. WHY? because the buyer assumed a 5% increase for 3 straight years.
If the buyer is wrong in 1 out of the 3 years the profit is….ZERO!!!
So again I ask, would you have made this purchase???