Buy now or wait – the hazards of market timing
and waiting to buy your first house
Base Scenario
|
Scenario 1:
Home prices stay the same
Interest rates increase by 0.75%
|
Scenario 2:
Home prices increase by 4%
Interest rates increase by 0.75%
|
Scenario 3:
Home prices decrease by 2%
Interest rates increase by 0.5%
|
|
Home Price
|
$280,000
|
$280,000
|
$291,200
|
$274,400
|
Down payment
|
$14,000
|
$14,000
|
$14,560
|
$13720
|
Interest Rate
|
Current rate 3.5%
|
4.25%
|
4.25%
|
4.0%
|
Monthly Mortgage Payment
|
$1365
|
$1475
|
$1534
|
$1408
|
One of the
most common questions I get is, “Should I wait to buy a home until I have more
money saved?”
I think
that good job stability and credit history are almost more important that
having a significant down payment on a house. Job stability will give you the
financial means to pay for the home expenses. Mortgage lenders are now conservative
to whom they lend to. A good credit history is mandatory if you’re putting less
than 20% as a down payment on your first house. And your credit history proves
you can pay your financial obligations on time.
A home
purchase is likely the largest financial purchase you will make in your life.
As a mortgage professional, I’m programmed to take the financial approach. I’ve
included a table to help explain why it makes sense for first-time home buyers
to purchase now, rather than wait another year for a greater down payment.
Here’s the
rational on buying a house now versus waiting a year for a greater down payment.
Most
first-time homebuyers can purchase a decent condo or home for the price of
$280,000. With $14,000 as a down payment (5%) the monthly mortgage payment will
be approximately $1365.
Home prices
are slated to go up in the next year. The average price increase over the last
40 years has been approximately 6% in Guelph. However, I’ll be conservative and
estimate that home prices will increase by 4% in the next year. Assuming that mortgage
rates increase by 0.75% in the year, the same house that you can buy today for
$280,000 will be worth $291,200. This same purchase in the future will require
another $560 more as a 5% down payment. The monthly mortgage payment will now
be $1408 per month, because of the increase in mortgage rates for the future.
In a year, the same house will cost $43 more per month in payments and an extra
$560 more in a down payment.
In order to
circumvent this issue, the borrower would need to put 10% as a down payment to
get a similar mortgage payment. They will need to save an additional $15,100
more in a year, or about $1260 more per month over 12 months.
If you
don’t have the 5% as a down payment, some good mortgage lenders are still
offering mortgages with no-down payments.
Waiting
another year to buy your first home can be costly. If you have good credit and
job stability, be proactive with your financial future and purchase a home.
More and more individuals are buying homes as single people too!
Please
contact me if you have any questions about buying your first home. I can be
reached at 519-763-3900 ext. 1001 or via e-mail at
lastovic.s@mortgagecentre.com.
