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Timing the Market: Why It Doesn't Pay to Wait |
 For buyers, market conditions couldn’t be
better – prices are relatively low and interest rates are at rock bottom,
affording more home than ever.
Should you buy now or wait? There will
always be those who try to “time the market,” but there’s one factor you can’t
know – when the market has hit bottom. You only know for certain when it has
passed.
The events of October 2011 testify in clear
detail why it doesn’t pay to wait.
In the first week of October, mortgage interest
rates dipped below 4 percent – the lowest interest rate since Freddie Mac began
keeping records in 1971.In week two, an
employment report that showed more jobs were added. The meager addition
of 100,000-plus jobs was just enough to send mortgage interest rates above 4
percent again.
As this article was being prepared, interest
rates had risen to 4.15%. By the time
you read this, mortgage interest rates could be lower or they could be at 4.25%
or higher.
Perhaps a better strategy is to wait for prices to fall, but
there are two problems with that idea. First, lower prices could take months or
years, or they may not fall again at all? Second, if home prices do continue to
fall, will rising mortgage interest rates wipe out any gains you may made by
waiting to buy?
A quick visit to a mortgage calculator will show you the
true price of waiting:
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For every $100,000 mortgage with a 30-year,
fixed-rate mortgage at 4 ½ %, your monthly payment will be $506.69 and you’ll
pay $82,406.71 in interest over the life of the loan.
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The same $100,000 mortgage at 5% interest costs
$536.82, a difference of $44.88more per
month and $93,255.79 in interest over the life of the loan. The
difference in interest payments alone is $16,157.43.
Here’s a real life example:
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If you buy a home at $200,000 and a 30-year,
fixed-rate mortgage at 4 ½%, your monthly payment will be $1,013.37 and you’ll
pay $164,813.42 in interest over the life of the loan.
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The same home at 5% interest costs $1,073.64, a
difference of $60.27 more per month and $186,511.57 in interest over the life
of the loan.The difference in interest
payments alone is $21,698.15.
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If your home dropped 5% in value and you were
able to buy it at $190,000 and 4.5% interest, your payment would be $962.70, a
difference of $50.67 per month, with $156,572.75 in interest over the life of
the loan.You’d save $50.67 per month
than if you’d paid $200,000.
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At 5%, your $190,000 home costs $1019.96, or
$53.68 more per month than if you’d gotten the loan at 4 ½ %. Your interest
payments would total $177,185.99 over the life of the loan.The difference in payments is $20,613.24.
If you had purchased your $190,000 home at 4.00% interest,
it would cost you $907.09 per month and a total of $13,6552.06 in interest.
The question is – did you?
There were plenty of signs that the bottom was
here, yet the week that mortgage interest rates dipped below 4%, the Mortgage
Bankers Association reported a decline in
weekly applications.
Only the ones who waited know their mistake.
The bottom line is we don’t buy homes only for
financial reasons. We buy homes to raise our families, be close to friends and
relatives and to be free from a landlord where you get nothing back but
cancelled checks at the end of the lease.
Don’t put your dreams off for a few hundred
dollars.
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