Yes interest rates have increased, and you, like many many potential buyers out there, may be thinking it is better to wait a year to buy. The hope is that the interest rates will drop, and you will be in a better position to buy.
But are you missing out on an opportunity?
Here is a projected outlook which shows that some short-term pain with the current interest rates, could lead to significant long-term gains.
Let’s take a look at buying a home listed at $500,000 in today’s market, against what buying the same home in 1 years’ time may look like:
|Buy Now||Buy Next Year|
|List Price||$500,000||$525,000||(5% annual appreciation)|
|Offer||$485,000||(97% based on market demand)||$525,000||(100% based on market demand)|
(Principal & Interest)
|$3,667.81||(taxes & insurance not factored)||$3,576.56||(taxes & insurance not factored)|
Here you can see that with a conservative forecast of 5% annual appreciation on the property, the purchase price has increased.
I have also factored that there will be a 1% interest drop over the next 12 months. Although this does benefit the monthly payments, it does however, also affect the purchase price. Where now we are seeing seller concessions, as well as below ask offers being accepted, a decrease in interest rates could significantly impact that. We all saw how the market reacted to low interest rates, and so with a drop in rates, it is inevitable that demand will increase. The many other potential buyers out there, waiting, will be back in the market with you!! For this projection, I again conservatively estimated that we would return to a “full-ask” market, but it is not beyond the realm of reality that this could in fact trigger a hot seller’s market again.
On face value, it does show that despite the potential increase in market demand and thus a higher purchase price, it is still beneficial to wait a year as it produces a lower monthly payment.
Or is it??
Let’s look at the bigger picture… if you did buy now instead of waiting 1 year, would you be better off?
|Buy Now||Buy Next Year|
|Equity||$48,500||Down Payment||$52,500||Down Payment|
Taking into account the market appreciation (where the home you bought for $485,000 is now worth $525,000!) the down payment, and the principal payments made over the course of the year, you are now standing at a potential $93,500 in equity in the home. That is nearly double the equity you will have if you wait until next year!!
It must be noted that the above does not include all costs, such as closing costs on the purchase, and other costs on the mortgage payment. It does however show the potential gross gains you can make in the market over the next 12 months. (Closing costs would need to be considered to determine your net gains)
But there’s even more opportunity… now can you refinance?
|New Loan To Value Ratio||82.2%|
Waiting 12 months would give a lower monthly payment by roughly $90 per month, which is significant. However, after 12 months of ownership, you would have gained 8% additional equity in your home. This means you would now be able to consider the option of refinancing to take advantage of the lower interest rates.
With the increase in value of your home and the payments made towards the loan, the extra equity in the home puts you in a netter standing. Perhaps, using the $4,000 you saved from a lower down payment, you can now refinance to get a much lower interest rate and have a much lower monthly payment. (You may also be in the position to remove the Mortgage Insurance payment too!!)
Again, it must be stressed that I, nor anyone, has a magic ball to see the future, and so these figures are projections only. However, should these projections (based on market analysis, trends, forecasts, and historical activity) hold true, then buying now really should not be considered as daunting …. It should be looked at as an OPPORTUNITY!