What might it cost you by waiting to save more for a down payment?
Obviously, there is more to a real estate transaction than the down payment. Even though that is a considerable part of it these days, it’s not the only consideration to keep in mind.
For example, did you know interest rates can rise far faster than property values?
Since the top of the housing market occurred in Santa Barbara on Dec. 20, 2009, our values have softened only 25 percent in today’s market. That drop took five years.
When I was a lender in the 1980s, I watched fixed rates go from the high 8 percent range to 11 percent in just two weeks. Just last year, I watched rates jump 1 percent in less than an hour.
Since younger buyers usually need to borrow most of the money for their first home, let’s look at how a rate increase would actually affect their expenses.
I spoke with a young family buying their first home the other day, and they were looking at something in the $460,000 range. With an FHA loan, the minimum required down payment is 3.5 percent, or $16,100, leaving a loan amount of $443,900. At 5 percent over a 30-year term, the payment of principle and interest on this fixed rate loan would be $2,382.95.
That is a payment comparable to rent today in our area. If they wait to save 10 percent down, that would change their payment by only $116 a month. If they wait to save money, they could completely miss the market.
Homes in this price range in our area are few and far between. This price range has been the hottest part of the market for the past two years. Considering our national debt and the pressure on interest rates to rise, let’s take a look at what an increase in the rate would do to this family as they wait to save more down payment.
If interest rates rise just 1 percent, the payment would go up 13 percent, and a 2 percent raise would change the payment by 26 percent. This would automatically disqualify most buyers from a home purchase immediately.
They wanted to wait and save more money to put down before we spoke, but afterward they realized that was not their highest priority. They need to buy today so they can still qualify.
If you’re waiting to save more money for a larger down payment, think again. You may be waiting too long and miss the market.
There’s a saying in my coaching club that goes like this, “It’s better to be five minutes too early than one minute too late.”
What might it cost you to be one minute late?
— Elaine Abercrombie, a broker with Village Properties Realtors, is president of the Santa Barbara Association of Realtors. She can be contacted at elaine@villagesite.com.