Do rising interest rates mean you have to jump head-first into a home search if you’ve been on the fence? Interest rates are only one component to consider when making the decision to buy your first home, so maybe slow your roll a tad. But since we’re on the subject and rates do impact the monthly cost of home ownership, let’s examine what you’ll face if you decide to wait a few years.
Are Interest Rates Rising?
The simple answer is “yes.” The more complicated answer is “Yes, but not in a straight line.” Short-term movement doesn’t really matter to you if you are trying to decide whether to buy now or buy next year; it’s only the long-term trends than count. Given that the Feds are committed to seeing both short-term and long-term interest rates rise, it’s a pretty safe bet that mortgage rates will be higher in 2018 than they are in 2017.
How much higher? It’s hard to say for sure, but a rise of at least 0.500 percent wouldn’t be a shocker.
Home Prices Are Rising, Too
But there’s more to consider here than just the interest rate. What if the home you want to buy increases in value over the next year? According to the Core Logic Case-Shiller Home Price Index, home prices nationally have been rising more than 5 percent per year for several years now. Can you afford to wait a few more years, and add up to $30,000 to the already hefty price tag of a single-family home?
Crunching the Numbers
Let’s assume that your dream home (i.e. starter home you can afford) would cost you $300,000 today. Let’s also assume that you have 5 percent down and a 30-year fixed mortgage at 4.000 percent.* Then, let’s assume that for the same home next year you would have to pay 5 percent more, and an interest rate of 0.500 percent higher. A comparison of your theoretical purchase looks like this:
|Down Payment @ 5%:||$15,000||$15,750||$750|
|Lifetime Interest Cost:||$204,828.09||$246,602.08||$41,773|
|Months before MI Termination:||105||111||6|
|Lifetime MI Cost:||$14,714||$16,331||$1,617|
|Lifetime Cost of Owning:||$504,542||$562,184||$57,642|
What does the decision to put off buying for one year cost you? With these assumptions, you have to come up with an additional $750 for your down payment, and over the next 30 years you’ll pay an additional $56,024 in payments.
You will pay a little more for mortgage insurance and you’ll have to pay for about six months longer, because the higher your interest rate, the slower you pay down principal. Your total lifetime additional cost would be $57,642.
If interest rates do rise as expected, and if homes continue to appreciate at their current pace, you will pay a great deal more over your lifetime for your housing costs if you wait until next year.
No biggie, right? Well, let’s take things a step further. While you wait it out, you’re probably living somewhere. If you are paying $1,000 per month in rent then you will also have paid an additional $12,000 to wait a year before buying, bringing the total to $69,642. In a nutshell, delaying buying a home could increase your housing costs by over $2,000 a year for the rest of your working life.
For those who protest that they are living in their parent’s basements, there is an emotional cost to that arrangement, too. It may be hard to put a value on it, but let’s be honest: It’s time to move out whether you rent or buy.
You also might protest that you probably won’t live in your starter home for 30 years, and that is probably true. But chances are the sooner you buy your starter home, the sooner you’ll buy your move-up home, so the math still works out about the same.
You never know what can happen to interest rates — no one has a magic crystal ball. No one can tell you where interest rates or home values will be in a year. But the math is easy. If interest rates do rise as expected, and if homes continue to appreciate at their current pace, you will pay a great deal more over your lifetime for your housing costs if you wait until next year.
So Buy Now No Matter What?
There are more considerations than just the lifetime cost of housing. Do you have enough savings so that you can afford the down payment and not leave yourself broke? Is your job stable enough to rely on the income? Could you find yourself having to move for a new job? Are you emotionally ready for the responsibilities of homeownership? These questions and more are all part of the process of deciding when to buy your first home.
If you wait until all of the answers point to “yes,” however, you are likely to pay substantially more over your lifetime.
*Interest rates depend on many factors, and change every day. Your interest rate may be considerably different than this.