To Buy or Not to Buy?

by Brian Berman on July 18, 2010

buy vs rentA client recently told me that they didn’t feel that now was the right time to buy because they were worried about housing prices.  They had just sold their house and were thinking about renting for the next year.  They had walked away from their sale with about $25,000 in cash.  I didn’t understand why they would want to rent.

The problem with buying a home is that it can often be an emotional process, and when emotions are involved buyers tend to focus on the wrong things.  For example, a friend of mine who is a financial advisor told me that while his main job is to manage his client’s money his second job is to remove the emotion out of investing.  That is just what a good mortgage consultant will do for you.  They will help you remove the emotions out of making a financial decision and show you the correct path.

These particular clients were worried that if they bought a new home they may lose some equity if home values continued to drop.  My goal was to show them what could happen if they waited 1 year.  Here is what we came up with:

The home they were looking to buy was $250,000.  They were going to make a $25,000 down payment and get a 30 year fixed mortgage at 4.25%.  The monthly payment on the loan would be $1,106 and $13,272 yearly. (Click here for Mortgage Calculators)

The problem was they were focusing on the wrong number in the transaction, the price of the house.   They have two children who were just entering middle school and high school.  They would probably stay in their next house for 6 to 7 years until both kids graduated high school.

Having all of this information my goal was to find out if waiting our buying was the right option.  We had to make a few assumptions on what the market would look like 12 months from now.  Interest rates just hit their lowest level in the last 70 years and a buyer with excellent credit could get a rate around 4.25%.  Most experts would agree that in the next 12 months rates are going to go up.  No one really knows exactly where rates will be but for this example let’s say they 1% higher or at 5.25%.  Let’s also assume that home values went down at about 3% over the 12 months. 

Using the above assumptions would make the home that was $250,000 now worth $242,500.  With the same down payment of $25,000 and the new rate of 5.25% their monthly payment would be $1201 and $14,412 yearly. (Click here for Mortgage Calculators)

Clearly the new payment is $95 a month more and will cost them $1140 more per year.  This was shocking news for the buyers.  They thought that if they waited and bought the house at the lower price, even with a higher rate they would be saving money.  But the real shocker came when we looked at how much they would have spent on rent.  They were going to pay $1250 a month on rent for 12 months.  So not only would they have spent $15,000 that year on rent they would have nothing to show for it. 

The moral of the story is make sure that you are working with honest, and knowledgeable realtors and mortgage professionals that can help take the emotions out of the financial decisions making process.  Now we are not telling you that buying a home should not be an emotional one, but when it comes to financing leave your feelings behind!

  

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Mortgage Atlanta, LLC. 601 Woodlawn Dr,, Suite 340. Marietta GA 30067. Phone: 678-564-1522 info@mortgage-atlanta.com

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