Buy now or wait for better rates ?
Recently I was asked a great question from a local realtor. Her clients are looking to buy BUT are on the fence about whether to buy now or wait 6 months to see if the interest rates go down.
With the state of the economy now, there is anticipation that home prices may drop in the future, however there is also talk that mortgage interest rates are on the increase.
What is the best option for saving money?
Buy now or wait 6 months?
There is no crystal ball in the mortgage world. While there is speculation that interest rates will go up, there is no exact time frame of when or how much.
Every fall/winter, I’ve heard that mortgage interest rates are going up. Sometimes they do, sometimes they drop.
Mortgage rates are currently at record lows. As of December 21, 2015, most 5 year fixed rates are at 2.79%.
These rates have been increasing since fall.
Average mortgage rates should be 4-6% but those rates have been seen for quite some time.
An average home price of $350,000. Most people that own homes around the $350,000 price range that have bought within the past 5 years aren’t equity rich.
Normally these homeowners have put 5% down when they purchased and when you factor in the mortgage default insurance premiums, the cost of selling (realtor & legal fees), there may not be much equity to drop the purchase price significantly.
Now with interest rates…..
There are rumours that interest rates are on the rise.
What if interest rates increase by .50% in the next few months to 3.29%?
What affect will this interest rate have on payments & interest costs over a 5 year term?
Let’s do the math & find out
Buy now with a $350,000 purchase:
5% down at 5 year fixed rate of 2.79%:
Mortgage with default premium included: $344,470
Monthly payment: $1593.30
Balance after 5 yrs: $293,236.90
(Total payments over 5 years: $95,598 with $44,364.87 to interest and $51,233.13 to principle)
Wait 6 months & purchase price drops $10,000 to $340,000 but 5 year fixed rate increases:
5% down at 5 year fixed rate of 3.29%:
Mortgage with default premium included: $334,628
Monthly payment: $1633.83
Balance after 5 yrs: $287,597.38
(Total payments over 5 years: $98,014.80 with $50,999.22 to interest and $47,029.98 to principle)
The purchase price may drop $10,000 but your payments increase $40/month.
You saved $10,000 initially but at the end of the 5 year term, there is only a $5639.52 difference between the $350,000 price at the rate of 2.79% & $340,000 price at the rate of 3.29%.
It cost you more in interest & increased payment over the 5 years.
Let’s look at the savings if you are looking at homes around $500,000 purchase price:
Buy now with a $500,000 Purchase:
5% down at 5 year fixed rate of 2.79%:
Mortgage with default premium included: $492,100
Monthly payment $2276.14
Balance after 5 years: $418,910
(Total payments over 5 years: $136,568.40 with $63,378 to interest and $73,190 to principle)
Wait 6 months & purchase price drops $10,000 to $490,000 but 5 year fixed rate increases:
Mortgage with default premium included $482,258
Monthly payment $2354.63
Balance after 5 years $414,479.07
(Total payments over 5 years: $141,277.80 with $73,498 to interest and $67,778 to principle)
The purchase price may drop $10,000 but your payments increase $78/month.
You saved $10,000 initially but at the end of the 5 year term, there is only a $4431 difference between the $500,000 price at the rate of 2.79% & $490,000 price at the rate of 3.29%.
It cost you more in interest & increased payment over the 5 years!
If you are looking to buy, have a discussion with your realtor on the demographics of the homes you are looking at.
Are they primarily owned by first time homebuyers that don’t have much equity in them?
If these home buyers bought with 5% down, there isn’t much equity to drop prices significantly.
Most think with the economy the way it is, there are going to be more foreclosures; hence larger price drops.
Banks want to recover their costs so don’t always expect a huge drop in price either.
An experienced realtor knows best with home prices.
After knowing these demographics of price values from your realtor, work with your Mortgage Broker to see if buying now or waiting 6 months is best for you. Often you may not be saving as much as you think.
Mortgage brokers can get rate holds for 120 days.
Secure these rate holds now.