The market has slowed due to interest rates hiking up toward the end of this year. This should be seen as a potential positive position for buyers, even if that’s not what people are talking about. Let me break it down.
An example, is 1 Main Street, apartment Unit 1A. This home was worth $1,000,000 in March, but today you can buy it for $900,000 due to the “situation”. This is a basic $100K savings for the buyer. But the cost of financing has gone up, but how much?
Let’s say this example has you financing 80% regardless of the purchase price.
Buying in March. ($1,000,000)
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Down payment of $200,000
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Mortgage payment of $3,376 (3% rate)
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Debt $800,000
Buying in October. ($900,000)
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Down payment of $180,000
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Mortgage payment of $4,561 (6.5% rate)
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Debt $720,000
Buying now saves you $20K in down payment and you hold $80K in less debt. But you have yearly mortgage payments of $14,220 higher than the March purchase. Now if we believe it will take three years before you can refi back down to a similar rate as the March purchase. The increased mortgage costs will be $42,660.
So in summary:
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Extra costs $42,660
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Savings of $100,000
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Net profit for buying now over market $57,340
There are some other costs I’m not going to go into. There are savings on closing costs for the current market purchase, then there will be fees for the refi in year 3. I believe these costs will wipe each other out in most scenarios.
But the additional benefits of buying in the current market are:
- Saving $341 per month once you refi the loan
- This is due to the debt being lower in the current market purchase
- Having less debt. This will not only give you more profit when selling but will also give you a better opportunity with cash-out refi’s or second loans when needed
The reason why buyers leave this market is due to interest rates keeping you from being qualified for lending (DTI) or because they are reading scary articles without any bases. But it is always more advantageous to purchase a home in a high-interest rate market, yes I said that and it is true.
