More and more people are pondering the buy now or buy later question when it comes to buying a home.
Waiters are waiting for house prices to drop, knowing that affordability is at a record low.
Non-waiters either can’t wait or don’t want to wait because they expect competition to heat up when things change, or they just buy without knowing that prices have peaked.
But is it possible to get the best of both worlds? Can you buy a house for a lower price and refinance at a lower rate later?
Let’s look at the math to see what this would look like.
who can’t wait to buy a house
I’ll take the Austin subway. Texas for this exercise. Price is also available. apparently down about 13% from its 2022 peak.
Let’s say someone buys a house there during the “peak” for $600,000 and puts a 20% down payment.
That’s a $120,000 down payment and a $480,000 loan, we’re assuming they’re set to a 30-year fixed rate of 3.75%.
The monthly principal and interest payment is $2,222.95, a relatively low payment. But they went to Redfin/Zillow and found their property was worth about $525,000. Ouch.
With a 20% down payment, they’re not in a negative position, but their LTV is now over 90% at least on paper.
Basically they’re not going anywhere. But they’ve been getting an excellent 3.75% fixed-rate mortgage for the next three decades.
Those who wait to buy but miss out on the lowest mortgage rates
Now consider buyers who entered the market in February 2023 with home prices down about 13%.
A $600,000 house is currently selling for $525,000, which means a 20% down payment will return $105,000, and the loan amount at 80% LTV is $420,000.
Good news with a lower down payment and a smaller credit line. However, the 30-year constant has risen to a much higher 6.5%.
This results in P&I paying $2,654.69 per month, which is $431 more than the full amount the person pays $75,000 more for the same home.
If the loan is suspended until maturity We’re talking about the total interest paid on a total of $536,000.
A 3.75% loan would result in only $320,000 in total interest.
This doesn’t look good for homebuyers who are waiting for prices to drop as mortgage rates increase dramatically.
But what if rates return to calm by the end of 2023?
Recent Home Buyers Refinancing Mortgage
|Buy $600,000||Buy $525,000||Refinance $525,000|
|Down payment (20%)||$120,000||$105,000||do not have|
Imagine a situation where inflation is under control. The Fed stopped raising interest rates. and relaxed long-term mortgage interest rates
No, not back to 3%, but called 4.5%. Buyers take advantage of this and get their rates down to 4.5% through the refinance rate and term.
The monthly payment was reduced to $2,128.08, about $100 less than those who bought at the “peak”.
And the total amount paid over the life of the loan is about $766,000, compared to about $800,000 for the loan issued at its peak.
The latest buyer is still paying slightly more interest. But less overall due to less amount borrowed.
Of course, this method only works if mortgage rates drop quite significantly. From the 6% range to the 4% range is certainly possible. but not guaranteed
and in the meantime Monthly payment is $400+ extra Tik Tok.
Still, buyers with higher mortgage rates have options. While the buyers with below-market rates can never really improve their situation.
Another benefit of the lower sales price is the better tax threshold. And there may be less competition from other buyers if higher rates dampen demand.
The downside is that you have to go through the stress and repetition of the home loan process twice.
and as stated There’s really no drop in guaranteed mortgage rates.
But this is the basic premise of marrying the house. Date line rates you may come across.