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!

Comments

Financial Nearsightedness

Years ago when the Consumer Financial Protection Bureau was created, we had some wacko thought that part of the job of the folks filling its ranks would be to . . . protect the consumer. In some people’s view, this would mean that builders of new homes would no longer be able to dangle the carrot of “free” incentives if the buyer would finance the purchase through the builder’s in-house or preferred lender. To those same people, it just made sense that the CFPB was created to even the playing field and make it so that the consumer got the very best deal available. Well, we were wrong. Builders ARE allowed to offer incentives for using their in-house and preferred lenders despite the fact that sort of goes against the idea that the consumer is getting the very best deal available. And for most consumers, all they see is the incentive, and this computes to less money coming out of their pocket at closing – and they’re right (sort of). The purpose of today’s article is si

Topless Professionals - Nope

Fads come and go, certainly, but you can’t always tell the difference in the moment between a fad and a trend – because refusing to adapt to the trends can be limiting . . . if not disastrous. Let me share a couple of examples where failing to see where things were headed didn’t turn out well. An engineer presented the idea of a “filmless camera” to the executives at Kodak back in 1975, but they laughed him to scorn. In 2012, Kodak was forced to file for bankruptcy because they failed to adapt to the digital world. We all know Steve Jobs and Steve Wozniak, but how many of us recognize the name of Ron Wayne (and, no, that’s not Batman’s brother)? Ronny was the third founding member of Apple, and he sold his 10% stake in the company in 1976 for $1500. His shares would now be worth over $50 billion. WAY BACK in 2000, Reed Hastings approached Blockbuster and offered to sell Netflix for $50 million. Blockbuster turned Hastings down. Netflix is now wor

Sitting on the Fence Only Gives You Splinters

“I woke up this morning and couldn't find my socks, so I called information. She said they were behind the couch. She was right.” Reading the words of comedian Stephen Wright isn’t quite the same as actually hearing them with his deadpan delivery, but they’re still funny. The same can be said for timeless wisdom: whether you hear it coming directly from the lips of a wizened old sage or you read it in a little missive such as this, it’s still wisdom, right? They say a picture’s worth a thousand words, so you’re about to get 2,000 words’ worth right here: I’m going to show you two graphs that are going to speak volumes about buying power and interest rates – far more than I could convey if I tried to write over 2,000 words (and probably put you to sleep). Obviously, this first graph shows how even a slight change in interest rates can affect someone’s buying power in the real estate market. There’s a fairly big swing between what someone can a

Search This Blog