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The Cost of Waiting to Buy a Home? Compare a Loan at 4.875% vs 5.875%! Friday, March 12th, 2010

 

Should you buy now or wait until the summertime or after to buy? That is a decision that many new buyers in the market are facing. As interest rates are going to rise over the next few months due to the government cutting off funds on their rate reduction program on March 31st, I wanted to show you the overall savings on a loan at 4.875% versus 5.875%, so you can factor in what the cost of waiting to buy might be. 

 

Let’s compare buying the same property at 5.875% vs 4.875% on a 30 year fixed loan!

Let’s say you are able to buy a property at either today’s record low interest rates, or you can wait to buy the same property later this year at a slightly lower price as values may come down a little, but rates will be higher. 

 

You can get a $327k loan with today’s qualifying interest rate of 4.875%, but later this year the same loan will probably qualify at a rate of 5.875%, (which is where rates will go to sometime later this year). We can even lower the loan amount $2k on the 5.875% loan to $325k to factor in a slight decrease in purchase price of the home later this year. The mortgage payment on the 5.875% loan is $1,922 versus $1731 for the 4.875% loan. This is a difference in payment of $192 a month. 

 

                                      Compare   5.875% vs 4.875%

   
 
 
 

Now let’s do a total cost analysis on both of these loans over 30 years. The 4.875% loan will save you in total $135,217 in mortgage payments and interest versus the 5.875% loan. 

                                                Total Cost Analysis      
  
 

Now let’s put these extra monthly savings of $192 back into the loan to payoff the home faster, by applying the $192 into the loan each month it will reduce the 30 year term to 24 years.

 

Use Monthly Savings to Payoff the Loan faster
      
  
As you can see above, by taking advantage of today’s record low rates, you can save over $135k in mortgage payments and interest on a home purchase around $325k, versus waiting for values to perhaps drop a little more and being stuck with a higher interest rate later this year.
 
Even if Values drop 5%, the lower rate loan is still cheaper!
Now many people may argue that values are due to drop a little more in value this year, and this is a very fair argument considering the first time buyer $8k tax credit is ending next month and the Feds rate reduction program is ending at the end of this month. But even if the value drops another 5% on this property above later this year sometime, this would only amount to $16,250 in additional savings for the buyer. These savings disappear once you factor in a higher rate at 5.875%, as this mortgage payment is still higher than the loan at 4.875%. 
 

The value would have to drop around $40k to a loan amount of $285k for the buyer at 5.875% to have the same payment on the $325k loan at 4.875%. I think it is fair to say that values will not drop that far.  

 

The “Total Cost Analysis” report above is a great tool to show you how much money you can save on the overall cost of a home purchase. As there are various other factors and issues apart from price reduction which effect the overall cost of a loan, evaluating the total cost is the key to selecting the lowest cost mortgage for a buyers individual needs.

 

Saving money is not all about getting a lower price!

 
 
A reduction in price is not the only way to get a great deal on a purchase. Too many buyers have become conditioned to being fixated on further value depreciation with all the data and reports they see on TV and read in newspapers etc. Do not let some report advising that home values may drop down another 2-3% make your decision to buy or wait, what matters is does this affect the overall cost of your purchase and will it really save you more money in the long term? 
 
I present this “Total Cost Analysis” above to all my buyers, so they get to see what will be the cost of waiting to buy.  If buyers understand that rates are going up, they will be able to make a better decision on the overall cost of a loan by factoring in a higher interest rate versus a lower price. As the numbers above show, a higher interest rate of 1% alone can cost you over $135k in mortgage payments and interest on a $325k home. 
 
If you would like to look at some figures or get pre approved for a home loan, please feel free to contact me directly at 858-200-9602
 
Best regards,
 
Michael
 
 

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