Don't Wait for the Rate (posted September 14, 2015)

Buckle up and get ready to have your mind blown! Okay, it’s not THAT mind blowing – some of you might even say, “well, duh” – but it’s still interesting.

The New York Federal Reserve’s economists recently published the results of a study: changes in down payment requirements have MORE influence over home buyers’ willingness to buy than changes in rates.

Surveying both buyers and renters, the Fed found that the effect of interest rates may be overrated when compared to even small changes in down payment requirements. The study found:

• Dropping the down payment from 20% to 5% increases the willingness to purchase, on average, by 15% among buyers and 40% among renters

• Decreasing the interest rate on a 30-year fixed-rate loan only raised the willingness to purchase by 5%, on average

As buyers straddle the fence between BUY RIGHT NOW with a higher interest rate and WAIT AN UNKNOWN PERIOD OF TIME to save 20% of the purchase price, here’s an example to give them a push. Take a look at the numbers for a house with the purchase price of $200,000 with a 30-year fixed mortgage:

WAIT

$40,000 down payment

Total Loan Amt: $160,000

Interest Rate: 4%

Monthly Mortgage (P&I): $763.86

versus

BUY NOW

$10,000 down payment

Total Loan Amt: $190,000

Interest Rate: 4.375%

Monthly Mortgage (P&I): $948.64

No doubt $763.86 is better than $948.64 for a monthly payment – that’s not what’s at stake here. The difference between those two payments is $184.78. In order for a person to save the additional $30,000 to go from a 5% down payment to a 20% down payment at the rate of $184.78/month, it would take over 162 months – 13.5 years! – to get to that point, which is almost half the life of a 30-year mortgage.

For many perspective buyers, that additional $185 is significant. We have a number of strategies to help them make up that difference so you can get them into a home as soon as possible!

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