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    The Cost of Waiting to Buy: Compare Buying With a 4% vs 5% Rate Tuesday, November 8th, 2011

    What is the cost of waiting to buy a home?” For example, lets say you can purchase a $400k home today with a rate of 4%, but you decide to wait 12 months and get a discount of $10k off the price, but rates have increased to 5%! Did you know it will now cost you $72,413 in additional payments over the life of the loan to purchase this same home? This is why it is so important that buyers fully understand “Cost vs Price”, because in terms of the “Cost” to buy a home and especially in the first time buyer price range, we are probably at or near the bottom of the market. Here is why.


    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 months time you can buy the home for $390k but it will come with an interest rate of 5%. In this example, the buyer is putting down only 5% and can qualify for Conventional financing with NO Monthly Mortgage Insurance” (click here for details).

    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

    A 1% rise in rates..cuts 10% from your purchasing power

    Here is a great chart for buyers to review and understand as it shows the “impact of higher rates on payments”. As you can see below, when rates rise by just 1%, a buyer loses 10% in purchasing power.

    For example, lets say a buyer is approved for a $400k purchase at 4% (see blue shade to the bottom right), but they decide to wait for prices to drop even more. Look what happens when rates increase by just 1%, with a rate of 5%, this same buyer can now only afford a price of $360k, as their purchasing power dropped by 10% (see blue shade to the top left)!

    Many buyers today think they should wait until they are sure that prices have hit bottom. But deciding whether or not to wait should be determined by where the COST of a home is headed!

    A historical look at interest rates over the past 40 years

    It’s also important that everyone puts the current interest rate environment into perspective, because here is a chart below that shows where mortgage rates have been over the past 40 years! On average rates have been over 7.5% for over the past 40 years, today we have rates around 4%.

    There is no guarantee that interest rates are going to stay this low for too much longer, as the Federal Reserve and the government have been artificially suppressing interest rates now for over 4 years, and one day soon they will start shifting higher especially as the US economy is now starting to show signs of improvement (rates will always increase in an improving economy)


    It’s very 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.

    As shown above, when rates move higher by just 1% a buyer loses 10% in affordability, just Imagine when rates go from 4% to 6%, a buyer will lose 20% in affordability. Therefore I believe we are at or very near the bottom of the market when considering the “overall cost to finance a home”, and especially in the first time buyer market of under $350k!

    If you have any questions in regards to interest rates or getting approved for financing, please do not hesitate to contact me directly at 858-200-9602. I look forward to chatting soon.