Monday, January 11, 2016 / by Jen Koenig
Today's interest rate is roughly 4%. This rate is currently expected to rise every quarter in the foreseeable future given the strength of the economy. Below is an example of how that will affect the costs of buying a home now versus waiting a year. I am using a loan amount of $300,000 for both of these, and the numbers will be exponentially different with an increased or decreased loan amount.
300,000 @ 5%:
The difference in 1% of interest will in turn end up costing you about $2,200 per year for the life of the loan regardless of the down payment if you borrow $300,000. While this is not a ton of money, it definitely is something worth considering. Also if the interest rate does anything more than a moderate jump every quarter than the costs will go up.
On top of that we're expecting that Dane County as a whole will do about 6-9% of appreciation this year given the lack of inventory and strength of the market. This in turn means that a home worth $350,000 today you can expect to pay $371,000 for at this time next year on a conservative basis of 6% appreciation. That means that, in order to make a 20% down payment (if you're trying to avoid PMI insurance), you'll need to save an extra $4200 this year IN ADDITION TO having to get preapproved for a larger loan for the same house. Lastly, assuming you put 20% down on each loan, the additional cost of paying the appreciated price next year means paying an extra $32500 over the life of the loan (assuming 5% interest on both loans).
So...let's compare all of that:
Buying a $350,000 house NOW with 20% down means a loan of $280,000. At today's interest rate, the total cost of this loan over 30 years is $481,235
The same house IN A YEAR with 6% appreciation will cost $371,000. With 20% down, you'll need a loan of $296,800. At the expected 5% interest rate next year, the total cost of this loan over 30 years is $573,583.
What this means is that waiting to buy the same house a year from now would cost you an additional $92,348 over the total life of the loan, or about an extra $3100 a year! Even if you only live in the house for 10 years, waiting means paying an extra $31,000 for the same property.
We're already seeing limited inventory and eager buyers this year, so if you're thinking of buying, now is really the time to do it! Contact one of our agents today and they can help you start the preapproval process and get you in to see some houses. While preparation is important, between interest rates going up and significant appreciation in home values, the longer you wait to buy means the more it will cost you. In the long run buying this winter/spring will most likely save you significant money over waiting another year.