Realtor Explains Down Payment Assistance Advantage in Oklahoma

In a recent post, we covered why it might be beneficial and financially viable for you to purchase a house, even at a 7% interest rate, and I promised you we’d go over a similar scenario using an FHA loan where the buyer only had $7,000 to bring to closing using some down payment assistance.

I’m Marcie Billen and I’m a real estate agent in the Oklahoma City Metro and in this post we’re talking about how you could bring as little as $7,000 (and possibly even as little as $4,000) to the closing table to purchase a home by taking advantage of down payment assistance. Then five years later, you could walk away with $30,000 or more. To explain, I’d like to introduce you to Michael. Now Michael’s fictional; in my last post we talked about Jessica. I chose Michael for this post because this was a very popular boy’s name in the 1990’s which makes sense because I think I went to elementary school with no fewer than five Michaels.

Sidebar: When I was 26 years old I had the opportunity to purchase a house with an FHA loan and the houses I was looking at purchasing were in court Norman, Oklahoma (meaning like in the middle of Norman, Oklahoma) which has really beautiful, old houses. I had the chance to purchase one of these homes and I didn’t because I was scared. It was it felt like a big leap to me and it was, no doubt. Purchasing a home is a big deal and I had reason to be scared about what that meant for me, but those houses were selling for a $100,000 at that time and now, nine years later, those homes are selling for over $200,000. All I would have needed back then to purchase one was about $3,500 for the down payment and then around $5,000 for closing costs – and I had that money! But, I still didn’t pull the trigger and I kind of regret that choice.

Michael’s Homebuying Journey using Down Payment Assistance

Michael’s maximum purchase price is $195,000, and he has his sights set on a $190,000 home. He’s negotiating for the seller to cover some of his closing costs. In this scenario, Michael is using an FHA loan and leveraging down payment assistance from OHFA (Oklahoma Housing Finance Agency).

Despite the 7% interest rate, after the seller contributes $5,000 towards closing costs, Michael only needs to bring $4,100 to the table, covering a portion of his down payment and some closing costs. This arrangement is facilitated by a skilled realtor—yours truly.

The Importance of Reserves when using Down Payment Assistance Programs

Although Michael has $7,000 saved, it’s crucial that he doesn’t utilize all of it. Reserves are a requirement of the down payment assistance program rules by OFA and FHA , serving as a safety net to ensure he can make his first mortgage payment. What excites me about this scenario is that in five years, Michael will have the option to sell his house, potentially moving to a larger or more desirable area, thus taking a significant step towards building wealth.

The Three Avenues to Wealth

Let’s explore the three ways Michael can make or save money through this home purchase: home appreciation, tax deductions on interest payments (although this won’t be substantial), and paying down the principal.

Michael is purchasing a $190,000 house, and his initial outlay of $4,100 includes lender fees, title fees, prepaid expenses, and part of the down payment.

Home Appreciation: Building Equity Over Time

Real estate appreciates, and in this case, we’re assuming a conservative appreciation rate of 4% per year. While the median home price in the Oklahoma City metro area is $260,000, Michael’s house costs less. In the first year, his property is projected to appreciate by approximately $7,600. It’s worth noting that historical data suggests higher rates, but we’re opting for caution.

This appreciation isn’t liquid cash; it requires time and patience, but during this period, Michael has a place to call home.

Tax Deductions on Interest: A Potential Benefit

Tax deductions on mortgage interest can provide financial relief, but Michael’s income of $50,000 places him in a tax bracket where he’d typically take the standard deduction. This aspect won’t have a significant impact on his finances unless he has other deductions or self-employment income, in which case consulting a CPA is advisable.

Principal Payoff: Building Equity Through Monthly Payments

A portion of Michael’s monthly mortgage payment goes toward paying down the principal, effectively increasing his ownership stake in the property. In the first year, he’ll reduce the principal by approximately $1,719. While the initial payments primarily cover interest, over time, more funds will contribute to building equity.

Year One Financial Summary After Using Down Payment Assistance

In his first year, Michael is set to save or earn around $10,000. This figure depends on whether he itemizes tax deductions or takes the standard deduction. Considering he brought only $4,100 to the closing table using the down payment assistance, this represents a substantial financial step forward.

Remember, real estate investments require time to appreciate, but in the meantime, you enjoy the benefits of homeownership.

A Five-Year Outlook with Down Payment Assistance

Should Michael choose to reside in his home for five years, his house’s conservative appreciation rate of 4% annually would bring its value to around $230,000. After paying down the principal by over $10,000, he’d owe slightly more than $176,000 on the house. Consequently, selling the house at the end of five years for a little over $316,000 (accounting for closing costs and realtor fees) could leave Michael with a profit exceeding $30,000.

The Bigger Picture

Despite the 7% interest rate, Michael’s investment in a home appears promising and is doable if he takes advantage of the down payment assistance programs available to him. Building wealth through real estate is a well-established method, though it’s not the only one. Various mortgage options and other down payment assistance options are available, and if you need guidance, please don’t hesitate to reach out. Remember, we didn’t touch on private mortgage insurance, but it’s factored into the equation.

Your thoughts and comments on the importance of homeownership are valuable. Feel free to share your insights below. Also, you can watch this video on closing costs, where we’ll delve into their significance and implications.