Some Buyer Math... or Does My Calculator Deceive Me???

Buyer A is not afraid of the economy and wants to take care of business! Buyer A finances a $300K house - 20% down  - balance on a 5%, 30 year loan. Loan amount is $240K. Monthly PI payments: @$1393/mo, interest for the life of loan is over $223K.

Buyer B is afraid that the prices are going to drop more and waits another 6 months before buying. In that six months, the market has dropped another 10% (let's give Buyer B every advantage). Buyer B finances the same house right next door, but now it's $270K instead of $300K. Great! Saved $30K... BUT WAIT! Interest rates have crept up a bit - now they are at 7%. Buyer B puts 20% down and finances the balance for a loan amount of $216K. Buyer B also saved $6K on the down payment. Buyer B's monthly PI payments are $1530/mo AND the interest for the life of the loan is over $300K!

So lets review...

Buyer A paid $6K more for the downstroke, saves almost $150/mo. The amount borrowed was $26K more than Buyer B's loan. If Buyer A keeps the home for 5 years, they will save nearly $9000 in monthly payments over Buyer B. Immediate net gain over Buyer B after accounting for the $6000 downpayment difference is $3000K. If Buyer A and Buyer B keep the homes for 30 years, Buyer A will save $40K in interest after deducting the difference in purchase price.

If Buyer A sells in 5 years, the balance on his 5% loan will be just over $220K. If Buyer B sells after 5 years, the balance on his 7% loan will be just over $203K. A difference of $17,000, NOT the $30K that was the difference in purchase price. In just 5 short years, Buyer B just spent in interest nearly half of what he saved by waiting for the price drop!

Many agents agreed in commenting on  Michael Pinter's blog (including me)  that the lower interest rates being offered were not going to be enough to boost buyer confidence - but they SHOULD BE! Buyers that can take advantage of todays rates can save some serious MONEY over the life of a loan. We need to be proactive and educate educate educate!

Buyers - get thee to a lender - PRONTO!               

(Disclaimer - my numbers and interest rates are NOT OFFERS or ADVERTISEMENTS! They are hypothetical and for mathematical example only!!)