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By Michael Clarkson The Mile High Home Hunter "How to Avoid Paying the Procrastination Tax"
Are you paying "The Procrastination Tax"????
In these times of economic hardship, there is a tax so many pay WILLFULLY!!! I can never understand why, but they do:The Procrastination Tax.
You pay it, and don't even realize it! And it's likely the biggest discretionary tax you will pay! It's a tax paid for with trade-offs.
Well, remember when you bought that Jan Michael Vincent "AirWolf" Leather Jacket back in 1984, instead of putting that $500 in Apple Computer stock? Well, that $500 of Apple Computer stock, if bought on September 7, 1984, would be worth over $22.5k today, though it peaked over $33k in December 2007.
What is the "AirWolf" Jacket worth today? Uh, not that much. And, THAT'S assuming you can live through the humiliation of admitting you ACTUALLY watched "AirWolf".
Don't you wish you could have THAT decision back? That's an example of a trade-off gone sadly awry.
Like that decision you wish you could have back, here is an opportunity to avoid as costly a mistake by waiting in the market, assuming buying up is a right move for you. I have shared this exercise with clients and they appreciated it -- the insight about the money lost to lost opportunity.
So, let's assume this is you:
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You have a $200k home -
You want to buy 50% up (as most folks do) to a $300k home -
You put down 3.5% (or $10.5k) with a $289.5k loan on your new home and are able to get a 5%, 30-year fixed mortgage BUT, you wait, because you think you can get that last $1k or $2k out of the market and then rates creep up.
What does that cost you? Well, depending on how long and how far rates move, potentially, a lot!
Take a look at this table.
Even if you make no decision, you really actually HAVE made a decision - or acquiesced to the decisions the market is making for you. If rates drift up to 6%, you will pay $2,179 per year MORE. In short, the longer you delay, the more you pay, all for waiting. The market made that decision for you. I call it the "Procrastination Tax".
Now, if you think rates will go down below 5%, then you get some uplift.
Have rates come down? Do you think they will again? Conventional wisdom is betting against you.
Think about it: at 5%, rates can go only go down a numerical maximum of 5%, but they can go up INFINITELY!!! Though unrealistic that they would go up infinitely, it is more probable that an upward change would occur rather than a downward change.
BUT, that isn't the only cost of waiting.
You also have the cost of lost appreciation, too!
Price Appreciation Rate * 1 Yr Appreciation 5 Yr Appreciation 10 Yr Appreciation
Current Home $ 200,000.00 3.79% $207,571.43 $240,834.05 $290,005.20
Future Home $ 300,000.00 3.79% $311,357.14 $361,251.07 $435,007.80
Lost Annual Appreciation Opportunity $3,785.71 $20,417.02 $45,002.60
* Appreciation Rate Uses Case Schiller Index Change of 26.5% from 2000-2007
You can lose on the front end with interest rate changes and on the back end with missed appreciation opportunity.
So, if you waited one year to pull the trigger on:
1. A $300k home
2. With an FHA loan (3.5% down)
3. And saw rates go from 5.0% to 6.0% and
4. Held onto the $300k home for 10 years,
How much Procrastination Tax did you just pay?
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Incremental payments due to interest rate change (year 1 to year 10): $21,792 -
Lost appreciation (you only lose the 1 year of waiting, assuming prices stay relatively the same on both homes): $3,786 -
Remember, 3.79% is a fairly low appreciation rate for Denver and is only indicative of the years prior to the mortgage crisis, not the next 5; the historical, national average is over 5%. -
Total incremental cost of ownership caused by delayed decision: $25,578 or 8.53% of the $300k home price (new home). That's the cost of your "Procrastination Tax". So, consider this my $25,578 gift to you, but it's only good if you use it. So, knowing me just made you $25,578 - how many other folks have done that for you today?
"A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty." - Churchill
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