Mortgage Strategy: Waiting vs Buying Now in a High Rate Environment
Explore the pros and cons of waiting to buy a home in a high-interest rate environment and see how it compares to buying now. Is it the right time for you to invest in your dream home?
The "American Dream" of homeownership has become increasingly difficult to obtain over the past 12 months. With some mortgage rates rising to a 23-year high, countless families approach home buying hesitantly. For many, the unresolvable problem arises as they no longer meet the requirements for their home loan due to the increased interest rates. On the other hand, some qualify under the higher rates but opt not to purchase at this time due to the inflated rate and subsequent payments they would have to bear.
Even though homebuyers are facing an increase in interest rates, this doesn't necessarily mean it's a bad time to purchase a new home. In fact, many experts believe that now is actually an opportune moment for qualified individuals to close on their dream home. While interest rates may be temporary, the decision to buy a home is a lifelong investment. With the market favoring buyers, there is ample room for negotiation on the price and even the possibility of getting the seller to cover part or all of the closing costs. As Chris Senterfitt, a seasoned Mortgage Originator, aptly puts it: "Rates are temporary, but homes are forever. Because there’s less competition right now, buyers have more leverage to negotiate the price and possibly get the seller to pay some or all of the closing costs. It’s a great time to invest in a home and start building equity."
Below is an illustration of the cost to rent vs. purchase that will affirm if you are in a position to qualify for a new home purchase amidst the increasing interest rates. You may find there’s not a better time to make your move. The following scenarios showcase the cost over 5 years based on an initial home purchase of $400,000. We will also assume closing costs are a flat 5% on the purchase to simplify the math.
Scenario 1: Continue Renting
Continue renting at $3000 per month with a rental increase of 3% per year.
Total Cost: 1 year: $36,000 | 2 year: $73,080 | 3 year: $111,272 | 4 year: $150,610 | 5 year: $191,000
Cost to rent after 5 years: $191,000 | Equity built: $0
Same home that you wanted to purchase at $400,000 before renting is now worth $450,000 because it has appreciated in value by 3% per year while renting.
Scenario 2: Purchase a Home
$400,000 purchase, seller gives $12,000 concession. $12,000 down payment plus a balance of closing costs not covered by the seller of $8,000. So total of $20,000 out of pocket to purchase home.
Estimated monthly payment including taxes, insurance, and mortgage insurance: $3600 per month based on 7.500% 30-year fixed rate.
1 year: $63,200 | 2 year: $106,400 | 3 year: $149,600 | 4 year: $192,800 | 5 year: $236,000
Cost to purchase after 5 years: $236,000 | Equity built based on value of home after 5 years: $50,000 | Equity based on the principal pay-down from minimum monthly payments: $37k
Total net positive: $42,000 after 5 years
Based on the scenarios above, the cost to buy over 5 years is roughly about $45,000 more than renting. However, owning real estate builds equity based on the annual appreciation of the home and paying down the loan balance with monthly payments. Using a low estimate of 3% appreciation per year in the scenario above, you would be at a net positive of $42,000 after 5 years, assuming that you stay in the high-interest rate loan you closed on at the beginning. At any point during the loan scenario above, you could refinance when rates drop, which would build even more wealth over the renting option.
In conclusion, the rent vs. buying comparison remains invaluable for prospective homeowners, even in the current inflated rate environment. While interest rates may fluctuate, the value of homes tends to appreciate over time, making homeownership a sound long-term investment.
Let us help you achieve the dream of homeownership! Visit any MIDFLORIDA branch or call to speak with a mortgage originator to discuss your options.