The Cost of Waiting to Buy: Compare Buying With a 4% vs 5% Rate
What is the potential cost of waiting to buy a home? Lets say you can purchase a $400k home today with a rate of 4%, but you decide to wait 12-18 months and get a discount of $10k off the price, but rates are at 5%! Did you know that it will now cost you an extra $72k in additional interest and payments over the term of the loan to purchase the same home. This is why it is so important that buyers fully understand “Cost vs Price”, because in terms of the overall “cost” to buy a home, I think it is fair to say we must be near the bottom of the market?
Compare buying the same property at 4% vs 5%!
Lets take a look at a purchase scenario. In this example below, on the left hand side we have a property that you can buy today at $400k and with an interest rate of 4%, but in 12-18 months time you can buy the home for $390k but it will come with an interest rate of 5%. On this example a buyer is putting down only 5% and can qualify for a NO PMI conventional loan.
The payment on the 4% loan is $2197 a month, whereas the payment on the 5% loan is $2363 a month. So even with the price reduction of $10k, the monthly mortgage payment on the 4% loan is still $166 less a month than the purchase at 5%.
Savings over 15 years
As you can see below, over the next 15 years, the total payment and interest savings amount to $47,203 on the 4% loan vs the 5% loan.
Savings over 30 years
Over the next 30 years, the total savings amounts to $72,413 for the 4% loan over the 5% loan. So the buyer who waited and bought the property with a 5% rate will pay an extra $72k over time for the “cost” of purchasing this same home.
In summary, by waiting 12-18 months for prices to drop by say $10k, but if rates just increase by 1% during this time frame, a buyer will pay an extra $72k in payments and interest over 30 years to purchase this same property. Or another way to look at it is this, if the 5% buyer wants to pay back the same financing costs over the term of the loan as the 4% buyer, the price of the home would have to drop another $40k for the 5% buyer to match the same costs! This is why buyers must truly understand how “Cost vs Price” works, and that the overall cost that it takes to purchase a property is also just as important as the actual price tag of the home.
The Impact of Rates on Payments
Here is a great chart below to share with buyers that shows the “impact of higher rates on payments”. As you can see, as rates increase by just 1%, values must come down 10% to match the same payment. Or in other words, when rates increase by only 1%, buyers now lose 10% in purchasing power or affordability. A good rule of thumb to advise buyers is that “their payment will increase by 10% when rates increase by 1%”.
Its important Buyers understand Cost vs Price
Waiting for a reduction in price is not the only way to get a great deal on a home. Too many buyers today have become fixated on finding the bottom of the market because there is too much emphasis on getting the lowest price. What is just as important is factoring in the overall cost to buy a home and that includes the interest rate and financing costs.
There is no guarantee that interest rates are going to stay this low, and there is probably not much chance they are going to go any lower as there is no secondary market for rates lower than where they are today, so the only way they will probably go from here is up. Therefore I believe we are at or very near the bottom of the market when considering the “overall cost to finance a home”.
If you have any questions, please do not hesitate to contact me directly at 858-200-9602. I look forward to chatting soon.
Tags: comapre buying at 4% vs 5%, the cost of waiting to buy with a higher rate, The Cost of Waiting to Buy: Compare Buying With a 4% vs 5% Rate
This entry was posted on Tuesday, November 8th, 2011 at 7:45 pm and is filed under The Cost of Waiting to Buy: Compare Buying With a 4% vs 5% Rate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.