I hear this question daily, and my usual answer drones on about interest rate projections, supply, and demand for homes blah blah!! So I thought I would run the numbers and see what makes the most sense based on the numbers, not my opinion!
Option 1 – If you bought a home for $100,000 and put 5% down and had an interest rate of 3.59% on a 5-year term amortized over 25 years you would have monthly payments of $498.46. At the end of the first year, you would owe $96,397. That is a decrease in your mortgage of 2.53% over the first year.
Option 2 – Let’s assume the housing market dropped by 3% over the next year and interest rates went up by 1/2% (most economists are predicting a 3/4% increase in that period). So instead of a $100,000 purchase, you only have to pay $97,000 and put 5% down, but the rate would be 4.09% with monthly payments of $509.29.
Now let’s look into the future and see which option has the lowest mortgage 5 years from the start of Option 1.
Option 1 – mortgage balance is $85,467
Option 2 – mortgage balance is $86,300
Plus under Option 2, you would have paid $480 more in monthly mortgage payments over the last 4 years than you would with Option 1 for a total savings of $1,313 per $100,000 in purchase price if you buy now instead of waiting a year.
If interest rates do go up as projected by 3/4% over the next year, we are looking at savings that would offset a drop of closer to 5% in values.
~Daryl French
