I am sure each have heard from potential homebuyers that I/we are going to wait to buy until mortgage rates drop. I remember in April reading a survey of homebuyers and 71% of them said they are waiting to buy a home until mortgage rates drop to 5.50% or lower. Is this a smart financial move?
Let’s assume our buyer wants to buy a $500k home and put 5% down and they have 780+ Fico scores as a qualified FTHB. I will use the rate of 6.50% in my example. Their principal and interest payment would be $3,002 with an APR of 6.778% as of July 2nd 4:30 PM.
But, our buyer decides to wait to buy until rates drop to 5.50% and it takes a year for this to happen. What do you think the value of that $500k home will be? Metro Denver homes have appreciated 6.5% a year on average since 1971. The value of this home may be $532,500 in a year assuming no bidding war. Assuming a rate of 5.50% their principal and interest payment would be $2,872, a savings of $130 a month. Sounds like waiting is a good idea…but is it?
First, the size of their down payment increased by $1,625 due to the higher price. Second, they would have missed out on mortgage amortization or principal balance reduction of $5,310 during this 1-year period. And third they missed out on $32,500 of appreciation in their new home. In total these buyers missed out on $37,810 in potential wealth increase by waiting for mortgage rates to drop.
And here is what I am very concerned about…once rates do drop to 5.50% or lower I believe their will be a stampede of buyers for homes especially for cheaper homes. Thus, this $500k home today may sell for $550k or $575k. Now at $550k price at a rate of 5.50% their principal and interest payment would be $2,967, a savings of $35 a month. Even worse they may not be able to buy any home because we might experience big-time bidding wars again that kept many buyers with small down payments from buying a home in 2021 and the first half of 2022. So, waiting to buy may keep them from ever buying a home.
Instead, buy now when prices are lower and then refinance when rates do drop and you can lower your payment then. This way you can have “your cake and eat it too”.