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Breaking down real estate monthly payment calculations in today’s ads

February 15th, 2007 by Kenric

I pulled this off of the Bubblemeter Blog.  This type of advertising is just shady.  It targets the people who do not understand the fine print and just focus on monthly payments.

Own at MICA for Less Than You Think–and Nothing Down!* The best value in urban living is well within reach. In fact, it’s right here at MICA. Now you can own a sunny, spacious one-bedroom MICA condominium for only $1,315.20** a month–with NO down payment. It sure beats renting!

Base Price $304,900

First Mortgage $762.25
Other Financing $374.71
Real Estate Taxes $254.08
Condo Fee $392
Estimated Monthly Tax Savings ($500)
____________
Total Monthly Payment $1,315.20**

**Terms and Conditions: Based on a sales price of $304,900; no down payment required. First-year payment quoted based on interest-only first trust for 60 months with a 2/1 temporary buydown off the note rate of 5.75%: first year, $762.25; second year, $965.52; years 3-5, $1168.78; interest-only second trust, $374.71 (note rate of 7.375%); property taxes, $254.08; condo fee, $392.00; total monthly payment for first year, $1,783.04; estimated monthly tax savings, $500.00; net monthly payment after tax savings, $1,315.20. Net monthly tax savings based on a 28% tax bracket. First trust APR, 8.356%. Limited offer, valid only for qualified buyers purchasing a primary residence. Prices, taxes and terms subject to change without notice. Please see sales manager or on-site loan officer for details.

Now that you’ve read the terms and conditions, what is the real payment on this condo?

First, let’s look at just the initial payment.  The ad leads you to believe that your total monthly payment will be $1,315.20.  If you add up all the payments it comes out to $1,783 a month!  How can you advertise that it’s only $1,315 a month?

Try paying only $1,315 a month on this condo and see what happens!

Second, let’s see how they get to $1,315/mo.  If you read the fine print, they assume that you are in the 28% tax bracket and that your tax savings from interest and real estate taxes will save you $450/mo or $5,400 a year.  When I do the math I can’t see how you can even claim that.  If you add up your interest and tax payments for one year.  You are paying $16,692 total.  In the 28% tax bracket, this would save you $4,673/yr.  It’s nowhere near $5,400.

Third, let’s finally check out the actual loans. You’ve got an interest only loan for 5 years with the payment going up by $200/mo the second year and another $200/mo the third year.  Your second loan is also interest only at $374/mo.  This seems like its fixed for a while.

So what does this cost to own?

• Year 1: $1,783/mo
• Year 2: $1,983/mo
• Years 3-5: $2,183/mo

I did a quick search and it looks like this condo would cost about $1,200/mo to rent.

If you believe the slick advertising and fuzzy math, it will get you in trouble.  A buyer for this condo must realistically be able to afford at $2,000/mo payment on this condo.  If you can afford $1500/mo look elsewhere. 

I’m sure the salespeople at the condo will tell you that you can afford it.

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