"I'm Waiting For Rates to Come Down"

 

"I'm waiting for rates to be lower"... "I'll buy after the Fed is going to cut rates"...or "Rates are too high to buy"...

New Year. Same Excuses.

 

Listen, I love my job, and I love being a part of my client's experience in getting into a new home.

But I've had this discussion already so many times this year, and we're only a little over 4 days in.

 

I don't know if it's the holiday hangover, or if I just need to vent, but I want to help put this to bed. So, if you're someone that shares the above viewpoint, let's test the logic. Let's see if the math is "mathing"… Does it make sense to wait and buy when the Fed cuts rates?

 

To answer this question RESPONSIBLY, we have to lay out some parameters of our Cost of Waiting, and disclaimers:

 

 The consensus for this year currently, seems to be 3 rate cuts from the Federal Reserve (link 1)

- We're going to use 1 per quarter so we have an 8 month timeline between our buyers

 

For home value appreciation, I'm going to use Zillow's Homebuyer Index from Nov 2022 to Nov 2023 

- Atlanta experienced a 7% increase in home value appreciation during this time

 On a $240,000 home, this equals $16,800 and an average of $1,400/m+ in equity

 

For our buyers and the interest rate, we're using the following parameters:

- PMI - 720 - 739 score

- 5% down / DTI of 43% or better for Private Mortgage Insurance (PMI)

- Rate is from MND.com avg daily rate (link 2) as of Jan 3rd, 2024 at 5p - 6.72%

- Future rate is for comparison purposes only*

- Payments will only include PMI and Principal/Interest

- Rent is $1,200/m for each person

 

So now let's break down our buyer scenarios 

 

Person 1: Bought a home today for $240,000

- Their rate is 6.72%

- They put 5% down which is $12,000

- They’re financing: $228,000

 The payment would be : $1,635

 P&I: $1,501

 PMI: $134

 

 Person 2: Bought the home next door in Aug/Sept 2024, very comparable to Person 1.

- The appreciation has pushed the home's value to $251,200

- Their rate is now 5%*

- Their 5% down is now $12,560

- They’re financing: $238,640

 Their payment: $1,467.00

 P&I: $1,333

 PMI: $134

 

******* Comparison Point 1: Monthly Payment and Rent Savings ********

The payment is the most obvious comparison point. To determine this we have to look at the payment difference between buying now vs. buying in Aug/Sept 2024. Then subtract the difference in down payment. Over 8 months vs renting:

 

 Person 2 would be ahead $2,920 if they waited

- Person 2 is saving $168 per month on their mortgage per month vs Person 1

- They've also saved $3,480 in 8m with renting, and waiting until Oct 2024

 Rent vs Person 1’s mortgage payment

- Difference in Down Payment: $560

 

******* Comparison Point 2: Equity / Net Worth *******

The second most common thing that's talked about is equity. To determine EQUITY we have to take the home's value and subtract the principal loan amount. For NET WORTH in this one, we're taking the EQUITY vs the Payment savings above:

 Person 1 would have $25,991 in total equity, which is a little over 10%!

 This is $13,431 more than Person 2

 Person 2's equity would be equal to the 5% they put down, or $12,560

 Home has increased in value to $251,200 (see above disclosure)

 Their loan amount of $225,209 after 8 months of payment

 Person 1's Net Worth is $10,511 more than Person 2

- Their 8m savings from rent is $2,920

- This is subtracted from the equity difference above

 

****** Comparison Point 3: Long-term Savings******

Third and final comparison point is long-term savings on the mortgage. You know the whole "date the rate" mentality? Well, it's time for Person 1 to dump their rate, and upgrade to a less toxic relationship.

 Person 1 is now refinancing their home at the 5%* rate that Person 2 waited for.

- Their home value is now at $251,200

- Their loan amount is $225,209, after 8 months of payments

- Person 1 is now refinancing at 90% Loan-to-Value

 This is like putting a 10% down payment when purchasing

 It improves the PMI and potentially the interest rate pricing

 Their new payment is $1,293 - This drops their payment by $342

 New P&I: $1206

 New PMI: $87

 This is also better than Person 2's mortgage payment they waited for by $174

 

Soooooo… Does it make sense to wait for The Fed to cut rates?

 

That's really a personal question. The numbers say "no", but that's not the only driving factor in the decision.

 

Everyone has "their right time", and if you can afford it now, I encourage you to do it!

 

But if now isn't your time, then that's great, too! Just don't use "rates" as an excuse.

 

Be honest with what your concerns are, have discussions with local experts, and get educated to make the best decision for you!

 

Link 1: https://www.housingwire.com/.../the-fed-holds-rates.../

Link 2: https://www.mortgagenewsdaily.com/mortgage-rates 

Written by Andrew Snyder of NFM Lending 

Andrew Snyder ​Mortgage Loan Originator ​NMLS ID#1578530 ​Phone: 614-578-2862 ​Mobile: 614-578-2862 ​100 Bull Street Suite 242 Savannah, GA 31401 ​[email protected]