When it comes to purchasing a home, doing nothing will be a lot more costly than buying ASAP. Rates are twice what they were in 2021 and the first half of 2022, so many buyers are sitting out on the sidelines right now. For some, it has to do with not being able to afford the home they want at today's mortgage rates and for others, they are not willing to accept that the low rates that were available are not only gone, and may never be available again.
My advice is to never have a bad attitude about purchasing a home. The people that get ahead are those that “make it happen.”
Let’s look back: in the late 70's, rates were around 10% and in the early 80's they went up to 18%. Ouch! Interestingly, many buyers went ahead and purchased at those record level highs and then refinanced their homes a few years later when rates came down. By the end of the decade, prices had continued to increase so that those buyers had a significant equity in their home.
Tenants who waited for the rates to go down didn't see savings because the price of homes had gone up. More importantly, they missed the opportunity to build equity in their home through amortization and appreciation. Owning a home is an amazing wealth building opportunity.
If you purchased a $400,000 home today with an FHA loan at 6.3% for 30 years, your total payment with taxes, insurance, and mortgage insurance premium would be about $3,459 a month.
That payment could save you a little bit if you were paying $3,500 for rent. However, when you consider the monthly appreciation, assuming a modest 3% annual rate, and the monthly principal reduction due to amortization, the net cost of housing would be $2,229. You would be paying $1,270 more each month to continue to rent which would amount to over $15,000 in one year alone.
That loss would be about twice the amount of the down payment to get into the home. Furthermore, in seven years, at the same modest 3% appreciation, your $7,500 investment in a down payment would grow to $138,000 in equity in seven years. If the appreciation is greater than that, the equity would be much more.
You're going to be paying rent to live in a home; you might as well benefit from the equity buildup from amortization and appreciation that is only available to the owner.
The benefit of acting now is that the housing market is more stable – we are not seeing 15-30 offers on every home that hits the market. When the Fed gets a handle on inflation, and interest rates moderate some, more buyers will jump in the market and supply and with that demand, we will see prices rise. Then, homeowners can refinance to a lower interest rate, and your investment in the home will be at a lower basis.
To run your own numbers, you can use my Rent vs. Own calculator. If you have questions, call me and I'll explain how to use it and what to expect for the home you'd like to have.