The numbers tell us everything, and this time they say that waiting to buy will cost you.
I’ve been getting a lot of questions about whether potential buyers should purchase now or wait until later. People are hoping for prices to drop a bit, but since we’re in a rising interest rate environment, it’s actually a good idea to purchase now—even if home prices do drop. Our prices now are not due to a market crash; we’re simply going through a market correction. We’ve seen rapid growth in the last eight years and now things are going back to normal. With this in mind, here’s why you shouldn’t wait to purchase when rate hikes are on the horizon.
These figures include principal, interest, and a 20% down payment.
I’ve calculated some scenarios to see what rate changes mean for buyers. Currently, a 5% interest rate is standard, which is an increase from 4% last year. They’re planning to raise it four to five times over the next year, so let’s assume the rate will go up another 1% in 2019.
A 5% interest rate on a $500,000 home comes to $2,147 a month. With a 5.5% interest rate, the payment is $2,271 a month. At 6%, your payment has jumped up to $2,398 each month.
For some perspective, let’s say you’ve held that property for 10 years. At the end of 10 years, a 5% interest rate means you will have paid $203,080 in interest. With 6%, you’ve paid $225,869 in interest. That 1% costs you around $25,000 extra.
At 5% over 30 years on your $400,000 loan, you’re paying $373,023 in interest. For the 6% interest rate on a $360,000 loan, you’ll pay $417,017 in interest over 30 years. That’s $43,000 more for just a 1% difference.
A lot of single-family homes are going to cost more than $500,000, so let’s look at another scenario. A 5% interest rate on a $700,000 purchase brings a payment of $3,006 a month. At 5.5%, the payment is $3,179 a month. At 6%, it’s $3,357.
Let’s say the home price has gone down to $650,000. At 6% you’re paying around $3,117 a month. You’re paying almost as much as you would at 5.5% for the same property.
Over 30 years at 5% on a $700,000 home, you’re paying $522,232 in interest. At 6% on a $650,000 home, you’re paying $602,359 in interest. With just this 1% increase in interest rates, you have $80,000 more in interest payments.
This is why, even if you pay $50,000 less on a home by waiting, you’ll pay a lot more over time when interest rates increase.
If you would like to know more about your own scenario to see if it makes sense to buy now, I’d be more than happy to help you. We can sit down, review it, and find out what works best for you. Feel free to reach out to me at (562)-316-2915, and know I look forward to hearing from you.
