Sitting out of the housing market and waiting for rates to go down may save you some money in the short term, but getting into the market as soon as it is financially feasible nets maximum value.
Some of the advice mortgage professionals and real estate agents give their clients is dependent on market factors that change daily. It’s true — mortgage rate quotes can even change by the hour at times! However, some of the advice they offer rings true no matter how the market ebbs and flows. One of those bits of wisdom that is true whether rates are high or low is “Never try to time the market.”
Mortgage and real estate advisors don’t just say these things because they’re hungry for their next deal and not because they like to hear themselves talk, either. There is one simple principle at the heart of this advice. Home values have traditionally — except in times of extreme economic hardship (think the 1930s or right after the downturn in 2008) — done one thing: appreciate. Usually, that general trend of home value growth means that homeowners’ growing equity stake as they repay their mortgage outpaces any additional cost imposed by rate.
Simply put, in the long run, waiting a year in the hopes that mortgage rates dip a percentage point or staying out of the market for multiple years and hoping for rates to return to below 5%, doesn’t save you money at all. In fact, it costs you money. If home values continue to rise while you wait, you not only miss out on those equity gains, but you also put yourself in a situation where your monthly rent payments, which have also increased in recent years in most markets, are helping your landlord gain equity in their properties!
Consider these examples of initial principal and interest payments on a hypothetical 30-year fixed-rate mortgage of $400,000.* In the first example, we’ll compare approximate monthly principal and interest payments you may see in today’s market (6.60% as of Dec. 12, 2024, according to Freddie Mac) with a mortgage rate drop of one full point and an assumption of a 5% value increase. That’s a decent barometer for what could happen in a year’s time, but remember, both rates and home values can be affected by unforeseen events in the future none of us have control over!
If you are paying a similar rent price to this hypothetical monthly principal and interest payment, somewhere around $2,000, for the 12 months you’re waiting to realize that full-point rate drop, it would take 14 years of payment savings to recoup your cost in rent. Plus, if you are able to get into the market now instead of wait the year, you save the $20,000 on the sales price of the home, equal to $1,667 in additional equity gained during that first year of homeownership.
In the next example, let’s say you waited two years, and in those two years, everything went the way you wanted it to go (and how often does that happen?). In this scenario, waiting two years has netted two full points’ decrease in rate, but the home’s value has increased by 10% from its original value of $400,000.
In this second example, assume the same rent payment of $2,000 (which is a conservative estimate based on what rent prices have done in the last few years) for the two years you’ve hypothetically waited for rates to go down. It would still take nearly seven years to recoup what you spent on rent in this scenario, not to mention the additional $40,000 rise in the home’s price.
If all you are focusing on is the monthly payment, you may look at these examples and see savings, but what you are missing out on is the additional equity and the lower home values in place now than those that we typically see as home values grow over time. Over the life of a 30-year mortgage, the savings you realize by buying now instead of waiting can easily climb into the tens of thousands of dollars.
Use the below Rent vs. Buy mortgage calculator to input your own loan amount, interest rates and rent payments to see how the numbers might look in your specific scenario. The calculator takes into account granular expenses like homeowners' association fees (if applicable), expected home value increases and rent increases, so feel free to play with the numbers to adjust for various factors. If you have any questions, please reach out to your Fairway mortgage advisor for help!
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*All hypothetical scenarios assume a 20% down payment, but within the calculator, you can adjust this percentage according you your own situation. Copyright©2024 Fairway Independent Mortgage Corporation. NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912-4800. All rights reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without prior notice. All products are subject to credit and property approval. Not all products are available in all states or for all dollar amounts. Other restrictions and limitations may apply. Fairway is not affiliated with any government agencies. Fairway is required to disclose the following license information. AZ License #BK-0904162; Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act, License No 41DBO-78367. Licensed by the Department of Financial Protection and Innovation under the California Financing Law, NMLS #2289. Loans made or arranged pursuant to a California Residential Mortgage Lending Act License; Georgia Residential Mortgage Licensee #21158; For licensing information, go to www.nmlsconsumeraccess.org; MA Mortgage Broker and Lender License #MC2289; Licensed Nevada Mortgage Lender; Licensed by the NJ Department of Banking and Insurance; Licensed Mortgage Banker-NYS Department of Financial Services; Rhode Island Licensed Broker & Lender; Fairway Independent Mortgage Corporation NMLS ID #2289 (www.nmlsconsumeraccess.org). Equal Housing Opportunity.