The Consequences of “I Think I’ll Wait and Buy Later”

The Consequences of “I Think I’ll Wait and Buy Later”

Many a buyer has used that line before thinking that they were going to get a better deal in the future.  In a falling market, there would have been some wisdom in that, perhaps.  But in a rising market, (both interest rates and home values) even a slowly rising market, let me show you why that’s not good advice to follow.  I think everyone would agree that interest rates are currently on the rise; they just can’t stay at this depressed/government-subsidized level forever.  From May 2 of this year to June 18 of this year, the interest rate for a conventional 30 year fixed rate loan with no points and no loan origination fee and a 20% down payment went from 3.625% all the way to 4.25%.  That represents a 17.24% increase in the interest rate.  At our Wells Group sales meeting this morning, one of my fellow brokers lamented that his buyer had not “locked” the interest rate on the loan they were applying for and with the interest rate rise, they no longer qualified for a loan large enough to purchase the home they had under contract.  The only cure was to try to buy down the interest rate and in order to do that it was going to cost them just under $13,000 in cash!  A significant change in that transaction, and a deal-breaker for many purchasers.

But how do these things affect your buying power?  Let’s assume for this illustration, that you are approved for a $2000 per month principal/interest mortgage payment.  (Just to keep it simple, we will not worry about the tax escrow and the insurance escrow.)  Here is how much loan that monthly payment will retire based on the various interest rates.

Notice that this recent increase in interest rate from 3.625% to 4.25% lowered the size of the loan that the $2000 per month payment would pay off, by $31,994;. which is a decline of 7.3% in the loan amount.  While there is no question that Durango prices dropped in the 2007-2011 timeframe, nobody thinks that prices are dropping today at a rate of 7.3%.  As a matter of fact, we are seeing an increase in values, especially in town and close to town.  If we say that appreciation rate is a modest 3%, a home that was $400,000 would now be priced at $412,000; an additional decrease in a person’s buying power.  These 2 insights make the decision “I Think I’ll Wait and Buy Later” even less favorable.  Clearly a person can wait and buy later, but they are going to buy less of a house and at a higher interest rate.

This is a repost from my www.DurangoRealEstateBlog.com which can be viewed directly on my main website www.BuyDurango.com