I recently replied to a question on Zillow about whether someone should buy now with a very little down payment using an FHA mortgage, or whether it made he more sense to wait until they had more money saved up for a larger down payment. This is a very interest scenario to run, especially with Rockville Maryland mortgage rates near all-time lows! Below is my analysis:
There are a lot of complexities and assumptions you are making when deciding to wait a few years, especially in our uncertain economic times. The most significant of your assumptions likely would be guessing where would interest rates be in a few years? No one really knows the answer, best case they are the same or slightly better, worst case is anyone's guess, maybe 6%'s? Throw in home prices possibly increasing, and now actually looks like a pretty good time to buy.
Let's look at some numbers if you were to buy now what your options would be. FHA has recently become extremely expensive, especially if your loan amount is above $625,500, but you can get in with as little as 3.5% down.
FHA Base Loan amount of $675,000, 1.75% upfront mortgage insurance ($11,812) 3.75% interest rate = P/I = $3,180, plus MIP of $840 per month (not tax deductible) = $4,020.
The other option would be to use a second mortgage product and keep your first below $625,500 loan amount. The caveat here is that you would need 10% down. To keep the math the same, let's assume $675,000 financed in this scenario also. To avoid MI altogether, we would setup a 1st mortgage at $600,000 @ 3.99% = $2,861 plus our second mortgage of $512 gets you total to $3,373 per month (fully tax deductible). You can pay off the second with no pre-payment penalty.
If rates jump to the mid 5%'s, lets just say 5.5% you would be looking at about $600+ more per month in interest payments which is significant of money over the life of the loan. $600 x 12 = $7,200 per year.
If home prices go up 5% over the next 2 years, your $700,000 home now costs $35,000 more.
As far as determining where things will be in 2 years with regards to home prices and where interest rates would be is impossible to know for sure. If you compare what you’re paying in rent to your mortgage payment with tax benefits, I think you’ll find that now is a good time to buy!
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