The worried home buyer:
Why you should be buying while interest rates are low even if prices are spiking.
I see it time and time again. Interest rates drop, and suddenly a buying frenzy happens in the marketplace. Multiple offers on every property and accepted offers happening at 5 to 10% over asking price and 5 to 10% higher than the similar property sold 6 months ago. It’s scary. The sudden shift makes you worried that you’re overpaying for a property and you will end up in a negative equity situation.
There’s two main reasons why I tell my clients, IT’S OKAY TO BUY. And perhaps, it’s an even better time to buy while prices are spiking. More likely than not, YOU SHOULD BE PARTICIPATING IN THE BUYING FRENZY!
First reason and the main reason - from a purely cost analysis standpoint - your payment will likely be LESS if you buy during the spike. Let me show you how:
Let’s say in 2019, you decided to buy while the market was a little more fair. Meaning, you didn’t have to compete against multiple offers and you had more negotiating power with the seller. Let’s assume you locked in a low price of $1,500,000 with an interest rate of 3.94%. These terms generate a monthly principal and interest payment of $7,109.44 and you’re happy because you got a good price on the home.
Even if you have to pay a 10% premium because of the current market frenzy, if you’re paying less in interest, you have a lower, more comfortable monthly payment.
Now let’s assume, you, the same buyer, decided to buy the same house in 2020. However, this time, there is a huge demand for homes because interest rates have dropped. Because there is a huge demand, you are now competing against multiple offers and can only lock in the price on that house at 10% higher than the 2019 price. (Side note - this is actually an extreme increase given that in July of 2020 homes price nationally were only 5.5% (according to CNBC) over the average in July of 2019) In other words, the loan amount is now $1,650,000, but based on current rates in October of 2020 at 2.89%, your monthly principal and interest payment is only $6,858.96. Slow down.. what? Your payment is actually $250.48 LESS per month which is around $3,000 extra per year you are not spending on a mortgage!
What would you do with the additional $250 per month or $3,000 per year?
Here is my second reason. And this one is a humble reminder of why we buy homes rather than continue to rent. This is NOT an investment, unless you plan on selling again next year, stop stressing about the price. If you want to make money in real estate, buy INVESTMENTS. Buying for yourself? This is HOME OWNERSHIP! It’s the memories made, it’s creating it your own space for yourself with the security of never worrying about a lease ending. It’s stability to have a family in a place you love with the comfort that you’re not throwing rent out the door every month.
Home buyers today are being overly concerned to see if they are making a “smart investment”. Newsflash! If you’re buying this to create a home for your family in a place and community you love, it IS a smart investment! No one buys the house they live in based on the numbers - they buy it time and time again because it’s shelter, it’s love, it’s HOME. There is pure value in simply being a homeowner. Don’t forget that when buying a home.