Now in today’s market everyone is sitting on a goldmine of cash waiting for the right moment to pull the trigger… right? Reality is that most dads lost their 401k’s in 2001 when the stock market crashed wiping out all dreams of a fat retirement, funding their daughters dream wedding or college education. So for most of us with barely enough to put a low down payment it is vital to take the plunge at the exact right moment.
So when will the market rebound? First the disclaimer, as a New Mexican real estate agent I am bound to tell you that I don’t know anything about anything at all. OK, so while I am not a CPA it does not take a brain to do some simple math that I learned recently at a Jackie Levenworth seminar. Let me show you how and if you are comfortable try it. If not, visit your CPA. Let’s look at the cost of waiting when interest rates move upwards from 4% to 5%.
Let’s use an example where a buyer is wanting to pay $1,500 principal and interest (P&I) per month. $1,500 monthly P&I ÷ factor x 1,000 = amount of money that can be borrowed (4% interest for 30 years): $1,500 P&I ÷ 4.77 (factor) = $314.46 x 1,000 = $314,465 mortgage amt.
Now if the interest rate creeps up to 5% here is the difference: $1,500 P&I ÷ 5.37 = $279,329 x 1,000 = $279,329 mortgage amt. This buyer has lost over $35,000 in buying power because of the increase in interest rate.
Now the question in this market for you to think about is what will be the outcome if a recovery comes and both home price and rates start increasing? The one thing that many people agree on is that timing the bottom of one variable is difficult, but both of these work together to determine how much house you can buy. Also there are tax considerations that should be factored into the cost of buying verses renting. These are more complicated and can be easily answered by your tax person.
In all seriousness, if you are waiting for “the bottom” you owe it to yourself to let a mortgage company run some scenarios and see how they figure into what you are qualified to buy. With such a major investment having a few pros on your side may lead to a great buying decision.