Steve and Tashia, a young couple thinking about buying their first home, sat in my office. They had brought all the paperwork I had asked them for: tax returns, pay stubs and bank statements. They were following their Realtor’s® advice to get preapproved before venturing out into the market.
Tashia was clearly ill-at-ease; she fidgeted in her seat and kept looking at her watch.
“Are you on a tight schedule?” I asked.
“No, no,” she answered a little too quickly. “I’m just…” She trailed off.
“Is there some part of the process that you’re not clear about?” I asked. “It’s a lot to take in.” She looked to her husband.
“No, I understand it okay, but…well, it’s just such a big commitment, and I’m not sure we should…I mean, maybe we should just wait until we’re completely sure.” Her husband gave the smallest shrug, as though to say, “Well, what you gonna do?”
I hear this often in my work with first-time home buyers. Let’s face it: borrowing hundreds of thousands of dollars for any purpose, let alone a home, is daunting. Steve and Tashia were definitely feeling the full force of fear.
There’s no question. The process of applying for mortgage, with its acres of paperwork and documentation, the unfamiliar terminology (What is an APR, anyway? Who is this “underwriter” you keep talking about?), waiting for a decision from this mysterious “underwriter” person—it is all quite intimidating for those who have never been through the process. That fear seems to trigger a sort of delay reflex in the would-be home buyer. That reflex often takes the form of a little voice that says, “What’s the rush? Why not wait until you’re sure about this? Just give it some time…like a year or so.”
While buying a home is a big decision that deserves careful consideration, waiting to buy can be costly. Here is what I mean.
Let’s say the house that will meet your needs today will sell for $350,000. Let’s assume that you have managed to save up a 10% down payment. Your down payment will be $35,000 (closing costs would add a bit to this). Your monthly payment (including mortgage insurance, property taxes and homeowner’s insurance) would be $2,018 a month, assuming a rate of 3.625% (APR 3.942).
What happens if you wait a year? First, the home you want will cost more. The well-regarded Case-Shiller Housing Index indicates that home prices are increasing about 6% from this time last year. That means that a home you could get for $350,000 today will cost $371,000 a year from today–$21,000 more.
Your down payment will also be more: $37,100 instead of $35,000. How about the mortgage payment? With a higher purchase price, you will borrow more money. But what will the rate be? That is not an easy question to answer, but you should be aware that the rates we are enjoying today are, courtesy of the Federal Reserve, artificially low. The Fed, in its efforts to stimulate the housing sector and thus the economy, has intervened directly in the market, buying mortgage securities to the tune of around $85 billion per month. They can’t do this indefinitely, and they have already indicated that they are reaching the end of that bond-buying spree. When the Fed stops buying mortgage securities, interest rates will rise. Let’s assume rates will be .5% higher next year: 4.125% (APR 4.461). Your total monthly payment at that point will $2,230 per month–$212 higher for each month for the same house.
Is it worth waiting? You tell me.