Another Common Buyer Mistake
This is a Real-Life Financial Study of the Drawbacks to Waiting.
Tom Perry REALTOR®
There are a number of buyers that may be making this big mistake. They are waiting to purchase a home for the wrong reasons. Granted, some are waiting because of the time it can take to clean-up credit issues or to season their employment at a new job. These are good reasons to wait. But there are certainly a few more that we could consider.
Buyers that are waiting with the thought that they can cut their monthly expenses to save enough money to increase their down payment and thus their buying power need to read this blog. In market conditions like we saw in 2008 and the years following, this could have been a useful tactic. However, in the current market with home prices rising and mortgage interest rates going up as well, this strategy, in nearly every case, will not work.
It’s too bad that most real estate agents either don’t know the failure of this strategy, can’t explain it in a way that is meaningful to buyers, or simply don’t care enough to take the time to fully explain the short comings of the saving strategy.
I understand that every loan program is different, every buyer is different, and every home is different. Your situation may seem to be unique. So, let’s talk or at least contact your lender or REALTOR® to get information and insights before you make the decision to wait.
- Future Values of the homes you are looking at today.
- The effect of appreciation and interest rates.
- How credit scores affect your mortgage interest rate.
This is an outline from a real-life situation from mid-August 2021. This is for example only. The theories are correct, and the numbers approximations.
Approximate current financial information:
- Income $5,836
- Monthly Debt $1,150
- 50% ratio for debt + PITI = $2,918 max debt
- $2918 – $1,150 leaves $1,768 for your PITI Pmt
- Qualify $275,000 FHA
Buyer is thinking about waiting till next year. They will save some money and pay-off some loans which might sound reasonable, but …
Here are a few overlooked issues with waiting to purchase something.
Today you qualify to purchase a home valued at $275,000
Appreciation of only 5% makes that house worth $288,750 next year.
- With the current financial situation above, you would not qualify.
- Also, next year, we would have to take off the 5% appreciation from the $275,000 leaving homes that are priced at $261,260 today.
Today, you qualified for a 3.375% interest rate.
Experts say that rates will go up to 3.75% by the end of 2021.
Also, we usually see an increase in March/April every (normal) year.
- If interest rates go up 1% to 4.375% you lose about 10% of your buying power. This means that you would qualify for homes priced at $247,500 (all financials remaining the same)
- Or with the same 1% rate increase, your payment would go up about 10% from $1,768 to $1,945. An increase of $177/month…$2,124 a year.
- The real issue is your debt-to-income ratio. The 50% debt to income ratio would mean an additional $4,248 a year income.
The worst case scenario … 5% appreciation and 1% interest rate increase.
If you do nothing to change your financial position and both the 5% appreciation and 1% interest rate increase does happen, it will decrease your buying power drastically.
- The homes you can look at next year would be priced at $235,000 today. Take a look at these homes. Is that what you are looking for?
Save your way out:
Because of the likely 5% home appreciation, the amount you would have to save to be at net 0 or simply breakeven would be $13,750 or $1,145 a month.
Because of the 10% loss from the 1% increased interest rate the amount you would have to save to be at net 0 would be $27,500 or $2,290 a month.
With both the 5% appreciation and 1% interest rate increases the amount needed to be saved would be $41,250 or $3,435 a month.
- Remember, this is to just remain at $275,000 purchase price.
Pay off your debt:
Pay off the loans equaling $11,700 which is currently a minimum payment of $300/month.
- This would add about $60,000 to today’s buying power (from $275,000 to $335,000)
- Note: Next year with the losses over the year from the appreciation and interest rate scenarios above you would qualify you for $287,000. (today’s listed price would be about $247,500)
NOTE: The monthly payment is $4.77 per every $1000 borrowed at 4% mortgage interest rate.
Your current credit score is 632 Credit Score.
- 641 plus what you need for Down Payment assistance. Just paying off one of the loans should improve your score past the needed 640 mark.
- Your borrowing power increases as your credit score improves.
- 720-740 gets you the best interest rates
Down Payment Assistance Programs
Qualifying for one of the many down payment assistance programs pays your down payment.
- It will not increase you loan amount.
If your research leads you to purchase a home now to take advantage of any future appreciation, you have a few options.
- Buy a smaller home, townhouse or condominium in the area you are currently looking in.
- Look further out from the area of your choice where prices are more affordable.
- In some markets you may have the option of purchasing a duplex, triplex or fourplex.
Before you get too discouraged, contact Tom Perry or Kenton Becker directly for more insights and assistance in making this big decision.
Tom Perry, REALTOR® with Realty Executives Brio – 206-713-2538 Tom@REX2020.com: Tom brings 30 years of experience and his “No Stress” buyer program to your assistance. You receive his initial buyer meeting, proactive property search, guidance through the purchase agreements and offer strategies before your search begins. Follow his program and you will find a home that fits your needs and your financials in a short time and stress FREE.
Kenton Becker with American Pacific Mortgage – 206-423-2552 firstname.lastname@example.org: Kenton has been Tom’s trusted lender for the past 5 years. His ability to guide buyers through the many loan options and simple explanations of this complex process makes his affiliation invaluable.