I know, I know, I’m stealing a page right out of the doom and gloom media’s playbook by using such a daunting headline as the “$33,000 Homebuyer Mistake” – but with good intentions I promise! I’m compelled to get this message out as I watch home affordability gradually slip out of reach for some of my friends and family. I’ve talked about this quite a bit on Saturday afternoons @ 1pm on Your Home Your Money (KWRD Christian Talk radio 100.7fm The Word) and it definitely gets the phone ringing and the email inbox loaded up.
If the market continues to move in the direction it’s moving – low inventory, larger pool of homebuyers, higher prices and higher rates – then waiting until the end of the year or the beginning of next year may end up costing you and your family ~$33,000. Keep in mind that mortgage rates have already moved higher by an entire percent (up from 3.5% to 4.5%) from May of 2013.
- Mortgage rates have already moved up more than 1% from Dec 2012 to Dec 2013
- Supply of homes on the market is still historically low = more demand = higher prices
- Feds are continuing to ‘taper’ = upward trend in mortgage rates
Let’s assume the Holmes’s are shopping for a home and ready to buy right now. The home they’re looking at is selling for $250,000. Here’s how the numbers break down:
$250,000 with 20% down payment @ 4.5% (4.687% APR) 30year fixed rate
Down payment = $50,000
Monthly payment = $1013 (principle and interest on $200,000 loan amount)
Now, let’s assume their friends, the Howards, are holding off until year end or beginning of next year
Using 10% for appreciation (economists project 8% – 12%) with 30 year fixed rates at 5.5% (NAR projects rates at 5.5% by Q1 2015). That $250,000 house they were looking at is now priced at $275,000 (10% increase in value = $25,000) which increases their down payment AND their monthly payment. Here’s how their numbers break down:
$275,000 @ 5.5% (5.685% APR) with 20% down 30year fixed rate
Down payment = $55,000 ($5,000 more as a result of 10% appreciation)
Monthly payment = $1249 ($236 higher payment due to higher rate AND increased loan amount)
Let’s look at the butterfly effect of higher rates and home value appreciation based on a 10 year and 30 year outlook
Monthly payment increase = +$236
Down payment increase = +$5,000
10 years of higher payment = $28,320 + $5,000 (10% more down payment) = $33,320
30 years of higher payment = $84,960 + $5,000 (10% more down payment) = $89,960
Oh No! What if you have a home to sell?
Something else to keep in mind…if you have a home to sell BEFORE you buy your next home…think about the impact these will numbers have on the potential buyers of your home. Using the numbers we just reviewed it would be suffice to say that the number of potential buyers for your home may in fact shrink as the year draws on. Think about it this way, home prices have increased AND rates have grown by 1% just since last May (2013). Therefore, the same buyers looking at your house right now are most likely completely different buyers than those that were looking at last year.
Your situation is unique, unlike anyone else’s
Please understand that this is not an attempt to scare you into buying a home. That is NEVER my intention. There are several other factors that go into the timing aspect of buying a home – it’s a HUGE investment! My goal is and has always been to simply provide you and your family with the tools you need to make an informed real estate decision. My hope is that if you have been considering buying a home and your finances are in the right place to do so then these numbers will have prepared you to make the best decision possible.
Obviously the numbers move as sales price moves up or down. PLEASE call or email me right now, let’s spend a few minutes together, and dial down the numbers based on your preferred purchase price. I can always be reached at firstname.lastname@example.org.