This is the tale of two Bobs, and their pathway to wealth. Bob A and Bob B were in the market for a $600,000 house.
Bob A's goal was to save enough money for a 20% down payment to avoid Private Mortgage Insurance (PMI) and get a low interest rate on his loan. 20% of $600,000 is $120,000. Bob and his wife, Betty set an automatic transfer of $2,000 per month from their checking account to their savings account to accumulate funds for their down payment. It would take 5 years to accumulate 20% of a $600,000 house. That's five years until Bob A would permit himself to buy a house.
Bob B wanted to get a house as soon as possible, so he tapped his savings account for a 3.5% down FHA loan in the amount of $21,000 and $12,000 for closing costs that Bob B and his wife Ashley could borrow from Bob B's 401k retirement account, and pay back at a rate of $2,000 per month. Interest bates on FHA loans typically run 1/2% lower than conventional 20%, 10%, and 5% down payment loans.
Bob and Ashley B shopped the $550,000 to $575,000 price range because their agent showed them that houses are typically selling for prices over the list prices, and they wanted room to bid-up their offer when they found their ideal house.
Bob and Ashley B bid on two houses and lost out to higher offers from other buyers. The third offer was the charm that won them a 4 BR, 2.5 BA house with a finished basement and a 2 car garage on a 1/2 acre lot. The winning bid was $600,000, and the amount financed was $579,000.
Their total house payment at 2.5% (2.62% APR), including tax and hazard insurance escrows is $2,983.58. Over the next five years each payment paid, on average, $1,359.00 toward principal per month that paid down the loan by $81,540.00. That was $81,540 equity in their house over five years, knocking the loan balance from $579,000, to $497,460.
Meanwhile, house prices gained value by 4% per year:
Year 1: $624,000
Year 2: $648,960
Year 3: $674,918
Year 4: $701,915
Year 5: $729,992
The gain in wealth when Bob and Ashley B pay down the note is paid down, plus 4% per year appreciation in value adds up to $211,532 in total wealth in their home over five years plus $120,000 Bob contributated to his 401k, for total wealth of $331,532.
Meanwhile, Bob and Betty A rented a house with the same size and features as Bob and Ashley B for $3,200 per month. Over five years, Bob and Betty gave their landlord $192,000, without any gain in wealth. At the fifth year when Bob and Betty A had $120,000 in their savings account, enough to buy a $600,000 house with a 20% down payment. Meanwhile, a house that cost $600,000 five years prior now costs $730,000, so they will have to get by with a house at $600,000 that would have been less than $490,000 five years prior to their five year cost of waiting to buy a house due to appreciation.
In the end, the cost of waiting to buy a house is mighty expensive. See Markita Woods, the Queen of Mortgages on a Zoom call or give her a call at 703-929-2274 to visit about how you could escape the cost of waiting to buy a house, and qualifying to buy now and build substantial wealth. Markita specializes in first time buyers, and veterans who are using their zero down Veterans Administration (VA) loan. Find out why Markita Woods is called The Queen Of Mortgages today.