I have had numerous clients mention recently that they may wait to buy because they want to save for a larger down payment to have a 20% down payment and avoid mortgage insurance. While it is laudable to want to have a nice chunk of down payment, waiting may not pay off. Some think mortgage insurance is a waste of money, and that they should avoid it at all costs. Again, this is commendable, but maybe not worth waiting for. I’ll show some numbers to explain further.
There are certain variables that affect this discussion. The important things to consider are:
- Rates may go up, and in an environment where rates have been so low for so long, that seems very likely.
- Property values may appreciate in the future.
- One may eventually drop the mortgage insurance with a conventional loan through a PMI drop.
The money that you think you will have saved by avoiding mortgage insurance by waiting and not buying in 2014 may be offset by higher rates and higher real estate prices in 2015. Below are some hypothetical numbers to illustrate:
$500,000 house in 2014:
Buyer has a 750 credit score.
Buyer has 10% down payment.
$165/month mortgage insurance.
House prices in a normal environment arguably go up 3% per year, which can obviously vary quite a bit depending on the area the property is in and the health of the economy. I have seen some parts of the country go up 5% to 10% last year, or even more. And we all know what happened in the 2008 debacle and the years following that real estate correction. So it’s hard to predict property values, but history shows that over the long haul, 3% is a very safe number in most areas. We will use 2.5% to be conservative.
Waiting to buy until 2015:
Say the $500,000 house went up 2.5%.
The price would then be $512,500.
An 80% loan with 20% down would equal $410,000.
Let’s assume rates go up ½% which equals approximately $131/month more on the mortgage payment.
The buyer now has 20% down and $0 mortgage insurance.
So waiting one year until 2015 under the above scenario means the buyer avoided $165 a month in mortgage insurance, but spent another $131 a month in mortgage payments. And the $165 in mortgage insurance would arguably have been dropped in 3-4 years thanks to appreciating property values and principal reduction on the mortgage balance. The higher monthly mortgage payment on the other hand, is for the life of the loan. Also, the buyer would have spent another $12,500 to buy the house. The overall increase in the carry cost of the property by waiting to buy it could be well into the tens of thousands!
So the next time you are thinking of waiting to buy a house, take a look at the market around you and determine what property prices are predicted to do, listen to what people are talking about as far as interest-rate movements, and it may be likely that you decide to do a smaller down payment and buy sooner rather than later.