I just had a conversation last week with a Buyer who is planning on buying a home in the next year or so. She told me her whole life story and what they were looking for in their ideal home.
There was one thing she mentioned that really stuck out to me, so I investigated a little more. She is looking in the $500,000 range, she has $50,000 saved right now, and is hoping to save another $30,000 so she can have a lower monthly payment.
In theory, this is a great idea. The lower your loan amount, the lower your payment. However, in the last six weeks, interest rates have finally started to climb. What does this mean for your monthly payment now?
Let’s compare the two options:
“Continue to save and buy later”
If you pay $500k and put down $50k, your loan amount will be $450k. If interest rates are at 4%, your total payment will be around $2,730 (including taxes and insurance).
Continue to save and buy later:
If you wait and save another $30k, your loan amount will only be $420k. That should lower your monthly payment right? Not exactly, rates are climbing, and if they jump from 4% to 5%, your monthly payment now is $2,840. Even with an extra $30,000 going towards the down payment, your mortgage payment increases by $110 each month.
Needless to say, these Buyers are seriously considering getting into the real estate market a little sooner than they expected.
One quick disclaimer:
Buy when you’re ready. Buy when you can afford the payments, and you are in a good position to buy.
What I am saying:
If you’re waiting solely because you want to save more for the down payment in order to lower your monthly expenses, you might want to rethink that strategy. In most cases, you don’t need 20% down to buy a house.
What else are you assuming will be the same a year from now?