We are going to wait to buy for another 5 years

I got a call the other day from a buyer who I had been working with. They said: “We are going to wait to buy for about 5 years”

When I asked them why they said:  “We just met with our lender and since we are only putting down 3.5%, we have to pay mortgage insurance. That will cost us an extra $35,000 over the next 5 years. We are just going to wait for 5 years until we can save enough to put down 20%”

I told them that I understood them not wanting to waste money. I told them to look for an email from me later in the day which would explain why waiting 5 more years would actually end up costing them money.

Here is what I wrote:

·         Your lender says that you will have to pay $35,000 extra over 5 Years for FHA Mortgage Insurance.

·         The home that you want to purchase is $600,000.

·         Prices on the San Francisco mid-Peninsula are still low, but they are on the rise.

·         We can assume a very conservative annual price growth of 2%. Prior to the most recent downturn, mid-Peninsula prices grew by 5%-6% per year, so a 2% growth is very reasonable.

·         A $600,000 home with a 2% annual growth over 5 years is $662,449 or a growth in the value of the property of $62,449.

·         Interest rates are at an all time low right now. Your mortgage broker quoted you 4.25%.

o   8.74% is the average mortgage interest rate since 1963.

o   As the US economy begins to recover, we can reasonably assume that interest rates will rise by at least 1% within the next 5 years.

o   A 1% rise in interest rates translates into a 10% increase in the buyer’s monthly payment. This essentially makes the house 10% more expensive.

·         Using the prior assumption of the home price rising from $600,000 to $662,448 in 5 years and applying the “10% more expensive” argument because of the interest rate increase, the monthly payment would now be higher.

·         Because of the growth in the price of the home and the increase in interest rates, the buyer would essentially be making a payment based upon a $128,693 more expensive home or upon a price of $728,693.

·         If we deduct the $35,000 mortgage insurance from the $128,693, you have essentially lost $93,693 by waiting for 5 years to buy.

By waiting 5 more years to purchase a home, the client has essentially cost themselves at least $93,693.