A Case Study
Lots of would-be home buyers will choose to rent instead of purchase because they don’t see enough monthly savings between their current rental payment and a mortgage payment. If a mortgage payment is more or the same amount as the rent, lots of renters will stay put. This type of short term analysis misses the massive long term financial gains from home ownership.
What will It really cost you to wait until next year to buy a home?
Let’s suppose you rent for $1,100/month but you want to buy a $250,000 home in the Denver-metro area. Here’s what it could look like if you wait until next year:
If the home price increases by $15,000...
That $250,000 home this year is going to appreciate and cost you much more next year. Prices grew 8% in 2017. Over the previous two years the appreciation rate averaged 10%. Over the last 30 years the appreciate rate has averaged over 6%. Even assuming the 30 years average appreciation of 6%, this year’s $250,000 home will cost you at least $265,000 next year.
Your down payment will increase too
If your plan was to put 10% down on your new home, the appreciated value at $265,000 is going to require that you save an additional $1,500 for your down payment.
And so will your mortgage payment
Currently, interest rates are running between 4.25% – 4.5%. To get an exact quote don’t take our word for it, talk to your lender. Experts predict that interest rates could go up by as much as 0.5% next year. With a loan of $250,000 (the house this year) at a 4.5% rate, the principal and interest amount of monthly payment would be $1,140.04. Waiting a year requires a higher loan amount at $265,000. With an increased interest rate of 5.0% the monthly payment amount would jump to $1,280.32. That’s an extra $140/month or $1,683.36 of increased payments in just the first year.
Your financial future
If you wait until next year that rental payment does nothing for you. You just spend another $13,200 in rent. If you buy this year, each mortgage payment pays down your loan, increasing the equity in your home.
Now let's look at the Five Year Benefits
All of the above is what it costs you in just year one. However, let’s look at the picture in five years. Suppose you sold your home in 2023:
|Home Purchased 2018||Home purchased 2019|
|Appreciation in 2023||334,566.39||334,566.39|
|Balance Left on Loan||205,105.31||223,307.55|
Because of the lower loan amount, interest payments and additional year of appreciation, you would have an additional $18,202.24 in home equity if you purchase this year vs next.
Long-Term Wealth Creation
Research by the Federal Reserve found that people who own homes accumulate 45x more net worth than renters over their lifetime. Much of this wealth gain is made simply through the appreciation in home prices and the increase in equity as a result of mortgage payments.
If buying this year vs next could save you over $20,000 in just 5 years, imagine what it could save in in 20 years! Actually, don’t imagine it, just do the math and then go home shopping!