On The Fence?
Time to Buy, Cost of Waiting
Would you like to own a home? Waiting for the market to hit the absolute bottom? Nobody has a crystal ball. Prices will be on the way
back up by the time that bottom is identified.
Four reasons NOW is the time to buy:
- Mortgage rates are low. In fact, they're approaching historic lows. An increase in mortgage rates will completely eliminate any advantage you may have gained by waiting for prices to decrease by a few thousand dollars more.
- Inventory levels are high.
- Sellers are motivated. Whether they are in trouble with their financing, have lost a job, or are worried about their future employment, many sellers need to sell and are willing to negotiate accordingly.
There is a Cost to Waiting!
There are several different ways that first time buyers lose money by waiting to purchase. The first is loss of tax deductions. In most cases, people who lack a mortgage pay more federal and state income taxes than those who qualify for a mortgage deduction. You can use a mortgage calculator to illustrate this point. For example, lets assume you are currently paying $1,500 per month on a rental. If you purchase a $300,000 property with $30,000 down and a fixed-rate 30-year mortgage of $270,000 at 6.25 percent, you’ll actually net $24,262 more, assuming that appreciation keeps pace with inflation, and you own the property for eight years.
Another way renters lose money is through wealth accumulation, generally in the form of creating equity by paying down the loan and through appreciation. According to the Federal Reserve, the average homeowner between 1995 and 2004 had a net worth of $184,400, of which approximately $60,000 was due to home ownership appreciation. To account for the difference of $60,000 of wealth accumulation, a $200,000 house would have to decline by 30 percent. Thus, each year a buyer waits to purchase a median-priced home, they lose $6,000 in potential wealth accumulation.
An additional way that renters lose money is through increased interest rates. For example, on a $200,000 mortgage, assume that interest rates increase from six to seven percent. By waiting, the buyer's payments increase by $1,578 each year causing a total loss (in payments and wealth accumulation) of $7,578. If interest rates increase from six to eight percent on that same loan, they will pay an extra $3,221 per year resulting in a total loss of $9,221.
Math smiles on move-up buyers
A dismal real estate market can be a good time to purchase a bigger house
Historic mortgage pricing info from Freddie Mac
Compared to other parts of the country, Indianapolis has been more stable.
