Timing Your Real Estate Purchase
As a follow on from last month’s article about the current market, this month I would like to address whether now is really the right time to buy, or ultimately could it cost you more if you wait!
To help we need to answer the question, “Why are you buying?”. If you are purchasing a home as an investment property and you plan to rent it, there is currently a huge demand for affordable rentals. It could be worth paying a premium to add units to your portfolio that should rent successfully and quickly. Similarly, house flipping profits have recently reached a 20-year high, so of course that is also an excellent reason. Both scenarios provide housing to others and in our current market with such a shortage of properties for rent or sale, they could have wonderful returns.
If you are looking to purchase a primary residence, this is where we need to see if it will cost you a fortune if you wait. Based on the most recent projections that I have read, the anticipation is that home prices will continue to increase by 7+% over the next year. If we look at a current purchase price of $700,000 and we take a typical 20% down payment, you will need $140,000 cash and the loan amount will be $560,000. Factoring in a 7% projected rate of appreciation for that home the purchase price will increase to $749,000. You will now need an additional $9,800 for the down payment and your loan amount will increase to $599,200, increasing both your cash outlay and monthly payments.
The next component to this thought is the mortgage rates. Where are they projected to be a year from now? Currently rates are bobbling around the 3% mark, and as I discussed last month, they are projected to stay in the 3% range, possibly reaching around 3.5% by the end of 2022. If we anticipate the price increase of 7% and a mortgage rate increase to 3.5%, the payments break down as follows. On the $560,000 loan above at 3% the basic mortgage payment will be $2,361 per month with life of the loan payoff amount of $849,954. On the 7% higher loan amount of $599,200 the basic mortgage payment will be $2,691 per month or $968,643 life of the loan payoff amount. That is an increase in the mortgage payment of $3,960 per year and a total payment increase of $118,800 over the life of the loan. I have provided these numbers just as examples, and you should include a conversation with your bank or mortgage broker in making any decision to wait, to get a definitive answer for your situation.
The last piece to consider is the additional equity that would be added as a result of the home price appreciation, and the total net worth increase a purchaser could gain by buying this year. Often overlooked, but an important component of the total picture when considering now or later.
I think it is safe to say that under the above circumstances, waiting a year to purchase could very easily cost you a small fortune, and miss out on moving to that new home too!
As always, if you have any questions or would like to discuss the current real estate market, please feel free to reach out to me directly.