Ask Our Broker With Peter G. Miller: Numbers Game
Question: Every real estate broker we meet says now is the time to buy. But is this true? If we wait a few years, we’ll have more for a down payment and will avoid mortgage insurance. Does it pay to buy now?
Answer: If you want to buy a $400,000 house today the numbers might look like this: You purchase with FHA financing and 3.5 percent down, the mortgage rate will be roughly 4.5 percent over 30 years. The loan amount will be equal to 96.5 percent of the purchase price or $386,000.
We could pay the up-front mortgage insurance premium in cash—$6,755 in this example—but to save money we add this sum to the loan amount. We now have $392,755 in financing. The monthly cost for principal and interest will be $1,990.
The loan requires $6,755 for the up-front mortgage insurance premium plus $273.42 a month for the life of the mortgage for the annual mortgage insurance premium. After seven years a borrower will pay $29,722 for mortgage insurance—$6,755 up front plus $22,967 in monthly fees.
Or, you could wait seven years until you have 20 percent down. Will you save any money by waiting seven years with 20 percent down and no mortgage insurance?
A $400,000 property with 20 percent down requires $80,000 up front. That’s what you will need to avoid mortgage insurance, and it’s far more than buying with $14,000 for a down payment ($400,000 x 3.5 percent).
The first question is whether a buyer can save $80,000 in seven years. Is this realistic? Save $952 a month and the answer is yes.
But even if it’s possible, we have no way of knowing if that amount will be sufficient in seven years. Home prices could rise, and, if they do, $80,000 won’t be sufficient for a 20 percent down payment.
Also, a down payment is not the only issue to consider. Interest rates might also climb and the home you want might be out-of-rage when you’re ready to purchase. According to Freddie Mac, the average annual mortgage rate between 1971 and 2017 was 8.16 percent.
Meanwhile, we have not considered that seven years of ownership comes with seven years of amortization. The homeowner will have paid the original debt of $392,755 down to $341,800. That difference of $50,995 is savings, regardless of whether prices rise or fall.
We don’t know which way home prices will move but we know where they are today. In your heart of hearts would you rather own or rent for the next few years? It’s a personal preference.
Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to firstname.lastname@example.org.
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