The question I get asked repeatedly by first time home buyers and some move up buyers is; this market is so fast moving, should I save up more money and jump in when the market is slower or buy now? For most buyers the answer is to buy now. To wait will cost you more money than you will save. Let me show you.
Let’s look at a $300,000 home. Here is how the payment on this home would breakdown: (taxes and insurance will vary depending on the home)
Purchase Price $300,000 Monthly Payment Interest Rate 3% $1,265.00 Principal & Interest Down Payment 3% Taxes $3,600/yr $300.00 (1/12th of taxes) Homeowners Insurance $2,000/yr. $167.00 (1/12th of insurance) Mortgage Insurance $113-160 $113.00 (mortgage insurance) $1,845.00 Total Payment
Your monthly payment is made up of principal, interest, 1/12th of your yearly homeowners’ insurance, and 1/12th of your taxes and mortgage insurance. The amount you pay for taxes varies by property. There are numerous things that go into determining what your insurance will cost, including, but not limited to: recent updates, replacement value, age of the roof, electric and mechanicals. The interest on your loan is front-end loaded, so every month the amount that goes towards the principal increases, but the payment remains the same. During that first year you would have paid your loan down $6,794.00. That is the dollar amount that went towards your principal. Even though that is money that you spend to live there, you would have had to pay to live somewhere and now the amount you owe on your home has decreased to $293,206. You are always paying a mortgage but when you rent that mortgage belongs to the landlord. Lastly, your payment has mortgage insurance. This is basically default insurance that you are paying for to protect the bank if you have less than 20% down. The cost of insurance depends on how many people are on the mortgage, the amount down, credit scores and if you have taken a home buyers course. So, as you can see there are many things that can affect your payment, but your principal and interest payment will remain the same for the life of the loan.
The biggest factor in buying now or later is what you would have missed out on in appreciation if you choose to rent for another year. This year despite Covid 19 and shortage of inventory in homes, homes have continued to appreciate, just at a slower pace that originally anticipated. However, according to Minneapolis Association of Realtors home prices have increased 3.65% SO FAR this year (from January – July of 2020). To be conservative, let’s say your home will have increased 4% throughout a year period – which totals $12,000. From living in your home for one year, you have earned $12,00. If you wait, that is $12,000 MORE that you would spend to buy the same house in the following year.
Interest rates are currently at an all-time 50-year historic low. You can lock your interest rate so that it will remain the same for the entire length of the loan. If rates went up next year to 4% (still a very good rate) your payment instead of a principal and interest payment of $1,265.00 would increase to a payment of $1,389.00 which equates to $124.00 MORE per month or $1,488 more every year for the life of the loan.
Below are calculations showing the 3 largest savings for this home:
$6,794.00 paid off on the loan (Vs. that money going to someone else's mortgage! i.e. renting!) $12,000 in home value appreciation $1,488/year for locking in at a lower rate $20,282 (in just one year!)
In addition, if you itemize on taxes you may have tax savings, improvements you made in the home will give you additional appreciation, and if you have renters you will have another source of income.
So you tell me, can you save enough to make it worth not jumping in right now?