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‘We’re Just Going to Hold Off for Now’

Pete Huegel

By Pete Huegel

We’ve heard them too many times: We’re going to hold off for now. We’re going to wait a while. We’re going to rent another year and see what happens. The list goes on. After weeks of showing homes to your prospective buyer, suddenly this once hot-to-trot buyer has cold feet. I’ve always believed as professionals it’s our job to make sure our clients have all the information necessary to make an educated decision and in the “We’re just going to hold off for now” scenario, one of the most important pieces of information is, what’s that going to cost you? Let’s take a look.

For a true analysis of the cost of waiting there are several factors to look at: purchase price; down payment; PITI; house payment; projected cost of renting; current versus projected future interest rates; potential appreciation of property; tax implications and principle paydown of the mortgage. We’ll need to make some assumptions to complete our analysis. It’s no secret that interest rates have been rising and are likely to continue to do so. For this analysis we’ll assume that rates rise by a half percent over the next year. So, a 4.250 percent rate on a conventional 30-year fixed today becomes 4.750 percent a year from now. For the purchase price we’ll use $300,000 and being first-time buyers, we’ll assume a 3 percent down payment for a $291,000 mortgage, which would give us a total PITI payment of $1,879/mo. using $2,000/year for property taxes, $600/ year for homeowner’s insurance and $230/ mo. for mortgage insurance. For the cost of renting a comparable home, we’ll use a $1,700/mo. for rent.

Here in Maricopa county, you’ll typically see projected annual home appreciation estimated anywhere between 4-6 percent. predicts Valley home prices to climb 5.9 percent in 2017. We’ll be conservative and use a projected annual appreciation rate of 5 percent. One of the biggest advantages of owning a home is the tax benefits, being able to deduct the mortgage interest, property taxes and in many cases the mortgage insurance. The size of these deductions depends on your federal income tax bracket, we will be using a 28 percent tax bracket.

Let’s start to break these figures down. Immediately, you can see that considering the small down payment of only 3 percent ($9,000), the PITI mortgage payment is $179/mo. higher than the rent payment, for a net negative of $2,148/year. Next let’s look at the projected appreciation of the home. Using our $300,000 initial value at a projected appreciation of 5 percent gives us net gain of $15,000 for year one and then factor in the principle paydown on the mortgage of $4,906. Next let’s take a look at the tax benefits of owning a home for that year. Using a 28 percent federal income tax bracket, the tax benefit would be a net positive of $3,996. Between the projected appreciation, principle paydown, tax benefits and factoring in a mortgage payment higher than rent, the home owner is $21,754 better off than the renter after just one year. I know you’re thinking, “But what about the closing costs?” Remember this prospect is planning to buy in the near future, one year in our scenario, so that figure will likely remain largely the same.

Now let’s fast forward a year. Our prospect has finally decided that it’s time to buy and would like to buy the same home they considered a year earlier. Luckily their dream home is still on the market (because that always happens, right?). Unfortunately, as we projected previously, the home is now on the market for 5 percent more than when they looked at it last year, listed at $315,000 and those pesky interest rates continued to rise, now at 4.750 percent for the same loan scenario. Using the same assumptions we did previously for property taxes, home insurance and mortgage insurance, that puts their PITI payment at $2,041 versus $1,879 just a year ago. This means that with each month our buyer owns this home, they’re $164 net negative as compared to purchasing the home a year prior. That will eat into that $2,148 “savings” they realized from the lower rent payment for a year very quickly, not to mention they’re a year further from having the mortgage insurance removed. Assuming we have a savvy homeowner that puts that $164 back into the mortgage each month, they’ll be able to pay the mortgage off in 25 years instead of 30.

Of course, the assumptions* we’ve made here are just that, assumptions, and the housing market and interest rates won’t always follow our assumptions, but I think we can all agree that as general rule of thumb, it’s better to buy real estate and wait than it is to wait to buy real estate.

These assumptions and calculations were provided by MBS Highway. Loan and monthly payment buying scenarios used for informational purposes only and does not reflect actual terms of loan offered. This document should not be construed as investment or mortgage advice or a commitment to lend. Your results may vary. There are no guarantees, promises, representations and/or assurances concerning the level of accuracy you may experience. For actual and current terms and rate information, please contact your lender directly. APR assumes 4.293% simple fixed interest rate and any additional fees included in APR. Monthly principal and interest payment based on a fully amortizing fixed interest loan of $291,000 with 360 monthly payments at the assumed simple interest rate.

A native to Arizona, Pete graduated from Arizona State University’s W.P. Carey School of Business in 2004 and immediately began his career in the mortgage industry. With 13 years of experience as a mortgage lender and over $300 million in mortgage loans originated, he has extensive experience with all loan types. Pete works first hand with all of his clients to ensure they understand the loan process from A to Z to eliminate any surprises and guarantee a smooth transaction.