07/10/2023
THIS POST IS LONGER THAN NORMAL BUT IMPORTANT TO READ IF YOU ARE LOOKING TO PURCHASE A HOME.
DOES A BUYER WIN BY WAITING FOR INTEREST RATES TO FALL BEFORE PURCHASING?
When interest rates rise, especially as they have over the last year, potential buyers find themselves in a difficult situation. "Do I wait for lower rates or purchase now?" "What makes sense?" As an MLO you've probably come across buyers asking these questions, so how do you respond? Properly advising a consumer on which course makes sense for them is difficult but is an integral part of what a mortgage loan officer does. So, here are a few things to consider when advising your client on whether to purchase a home now.
Home Price Appreciation: While the idea of waiting for lower interest rates can be tempting, it's important to consider the potential increase in home prices over time. If home prices rise significantly while you wait, the overall cost of the home could be greater than if purchased at a higher interest rate.
Rental Costs: Remember, if someone is currently renting, the rent is going toward someone else's mortgage, not their own. The money spent on rent while waiting for rates to drop could be building equity in their own home.
Interest Rate Unpredictability: Interest rates are influenced by many factors, including the economy and decisions made by the Federal Reserve. Predicting these rates is complex and uncertain. If rates continue to rise, waiting for them to fall could result in a missed opportunity.
Tax Deductions: Today, home mortgage interest is tax-deductible. This can help to offset the burden of a higher interest rate, making buying now more attractive.
Building Credit: By taking out a mortgage and making consistent payments, they have a chance to build a credit history. This can be a valuable step toward improving their financial standing.
Case Study Scenario
Let's assume we have a potential buyer considering the purchase of a $300,000 home and the mortgage rate is currently 7%. Let's also say the local area is seeing a 5% home value appreciation rate and the buyer is in a 22% tax bracket. The buyer is currently paying $1,900 per month in rent and thinks interest rates will be at 6% in a year. They are uncertain what to do. What is their best decision, buy now or wait?
Scenario 1: Buying Today
If they buy the home today at $300,000 with a 7% interest rate, the monthly mortgage payment (principal and interest) will be approximately $1,996. Over the life of a 30-year mortgage, they'll pay a total of about $718,156. In the first year of the mortgage, they'd pay approximately $20,925 in interest. With a 22% tax bracket, this could mean tax savings of about $4,604 in the first year. With the monthly rent of $1,900, over a year, this amounts to $22,800 in rent paid.
Scenario 2: Waiting a Year
If they wait a year and the home appreciates by 5%, the home will cost $315,000. Assuming the interest rate drops to 6%, the monthly mortgage payment would be approximately $1,890, and over the life of the 30-year loan, they'd pay approximately $680,000. In the first year of this loan, they'd pay about $18,881 in interest, which could equate to a tax savings of about $4,154 at the 22% tax bracket.
During the year of waiting, they'll pay $22,800 in rent (which builds no equity), and the total cost of the home (including interest over 30 years) would increase due to the price appreciation.
Comparison
The case for buying the house now remains strong when considering the current rent cost. By waiting a year, they spend a year's worth of rent ($22,800) without gaining any equity in a home. Even though the interest paid over the life of the loan is lower if they wait a year, this doesn't account for the money spent on rent and the increase in the home's price due to appreciation.
In this scenario, buying the house now would allow for building equity immediately, get a slightly higher tax deduction int he first year, and avoid a year of rent payments.
In Summary:
There are many variables and personal factors to consider when deciding whether to buy a home now or wait. The decision to buy a home involves many factors beyond interest rates. Properly advising the buyer is the most important part of an MLO's job. Looking at current interest rates is only a portion of what a good mortgage loan officer does.
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