Wait and save more, or nab lower interest rate?

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Wait and save more, or nab lower interest rate?

Postby Paddington79 » Thu Jun 27, 2013 1:35 pm

Hi All,
I posted about a week ago about trying to decide when to buy a home.
Right now my primary concern is that interest rates will edge up by the end of 2013, and we'll be hindered enough to rent forever. This is a nerve-wracking thought.
However, renting longer would allow us to save an even larger downpayment.
How can I calculate the bigger benefit?
Is it better to have a larger downpayment, thus reducing the mortgage, or is it better to put a simple 20 percent down, and nab a lower rate?
Thoughts? Thank you!
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Re: Wait and save more, or nab lower interest rate?

Postby Peter Foley » Thu Jun 27, 2013 1:44 pm

It is all guesswork, but my suggestion and reasoning are as follows:

Put the 20% down and get the mortgage now. I too think interest rates will edge up. In addition, housing prices are on the rise in many markets but certainly off their highs of just a few years ago. You can get a house now for a not unreasonable price at an interest rate that that most boomers like myself thought we would never see. My first purchase was a contract for deed at 8% when interest rates were above 9%. My next house was when rates were in the 11% range.
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Re: Wait and save more, or nab lower interest rate?

Postby nonnie » Thu Jun 27, 2013 1:49 pm

Are home prices rising in your area? They certainly are in many other areas. I would think that would be a major consideration. I've heard it said that as interest rates rise,home prices go down to compensate but living in California I've certainly never had that experience.

I'd say go for it if you have a 20% down payment. Here in California we are back to multiple bids in many areas as inventory is very low. A house just down the street had 10 offers and upwards of 40% of all purchases are 100% cash.

If you are not already familiar with your local market and what is going on that's the first step. You can never have too much information or start looking too soon. :-)

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Re: Wait and save more, or nab lower interest rate?

Postby Iorek » Thu Jun 27, 2013 1:50 pm

If you have 20% to put down and are otherwise ready, I would buy now.

People will disagree whether putting the extra money in the house is the best place for it, but generally nothing stops you from pre-paying principal (it won't lower your monthly payment, but realistically you may not be lowering it much more anyway).

If rates stay low you can refinance and if they don't, you'll be glad for the loan you can get now.

Also note that you should keep a decent liquid fund for repairs and other house expenses, so putting 20% down and keeping the rest liquid may make sense for that reason too.
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Re: Wait and save more, or nab lower interest rate?

Postby hpryder » Thu Jun 27, 2013 2:22 pm

Here in So. Ca, prices are going up fast. As an example, 40 yr old 3 br 2ba house across the street was on the market 1 day and had 6 offers on open house day above asking price of 650K. Sold for 680K. Similar house appraised 6 months earlier at 565K. So price increased 20% in 6 months.

Right now we are in an interest rate increasing environment and the math is against you if you wait. As an example:
a 400K house with 20% down results in your needing 80K to take on a 320K mortgage at 4.5% for a monthly of 1621.
With a 5% price increase this becomes:
420K with down of 84K and mortgage of 336K at 4.5% for a monthly of 1702.

So waiting cost you an additional 4K now + 29K over 30 yrs.
And 5% price increase is virtually nothing in So. Ca.
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Re: Wait and save more, or nab lower interest rate?

Postby YttriumNitrate » Thu Jun 27, 2013 2:43 pm

Paddington79 wrote:Right now my primary concern is that interest rates will edge up by the end of 2013, and we'll be hindered enough to rent forever. This is a nerve-wracking thought.


You know, back in 2007 people were thinking almost those exact same thoughts only it was housing prices, not interest rates that were going to be out of their reach in 6-12 months, so they had better buy now.
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Re: Wait and save more, or nab lower interest rate?

Postby nonnie » Thu Jun 27, 2013 5:17 pm

YttriumNitrate wrote:You know, back in 2007 people were thinking almost those exact same thoughts only it was housing prices, not interest rates that were going to be out of their reach in 6-12 months, so they had better buy now.


I don't think this is a good analogy at all. We're in a situation where housing prices hit new lows in 2012 vs. new highs in 2007/2008. The housing bubble then was clear to those who paid attention. That's not to say there will never be another one but prices didn't start to really climb on a national basis until 2013.

http://money.cnn.com/2008/01/29/real_es ... me_prices/
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Re: Wait and save more, or nab lower interest rate?

Postby YttriumNitrate » Thu Jun 27, 2013 7:23 pm

nonnie wrote:I don't think this is a good analogy at all. We're in a situation where housing prices hit new lows in 2012 vs. new highs in 2007/2008. The housing bubble then was clear to those who paid attention.


So you're saying it's different this time? :D

Yes, everything seems clear and obvious with a bit of hindsight. 10 years from now it will be easy to look back and say whether or not we're still in an interest rate fueled housing bubble with the fear of rising interest rates further jacking up prices, but right now it's hard to say. My point isn't that prices are going up, or down, I have no clue. It's that trying to time the market (be it housing or stock) and buying something based on greed or fear is a good way to get burned.
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Re: Wait and save more, or nab lower interest rate?

Postby EmergDoc » Thu Jun 27, 2013 7:39 pm

Paddington79 wrote:Hi All,
I posted about a week ago about trying to decide when to buy a home.
Right now my primary concern is that interest rates will edge up by the end of 2013, and we'll be hindered enough to rent forever. This is a nerve-wracking thought.
However, renting longer would allow us to save an even larger downpayment.
How can I calculate the bigger benefit?
Is it better to have a larger downpayment, thus reducing the mortgage, or is it better to put a simple 20 percent down, and nab a lower rate?
Thoughts? Thank you!


Too late. Rates are up 1% from the low. Of course, they're still 4% below where I bought my home in 1999 and 2% below where I bought my home in 2006. I see little reason to save up MORE than 20%. The main question people deal with is whether to wait until they can get 20% or not. The mortgage professor has a great calculator to answer that question.

http://www.mtgprofessor.com/calculators ... tor6a.html

You might be able to answer your question using that calculator too.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: Wait and save more, or nab lower interest rate?

Postby nonnie » Thu Jun 27, 2013 9:30 pm

YttriumNitrate wrote:
nonnie wrote:I don't think this is a good analogy at all. We're in a situation where housing prices hit new lows in 2012 vs. new highs in 2007/2008. The housing bubble then was clear to those who paid attention.


So you're saying it's different this time? :D

Yes, everything seems clear and obvious with a bit of hindsight. 10 years from now it will be easy to look back and say whether or not we're still in an interest rate fueled housing bubble with the fear of rising interest rates further jacking up prices, but right now it's hard to say. My point isn't that prices are going up, or down, I have no clue. It's that trying to time the market (be it housing or stock) and buying something based on greed or fear is a good way to get burned.


You *know* I'm not saying it's different this time. I'm saying it's not the same situation. Home prices are just starting to come back from lows. They've been coming back in CA for more than a year, way before interest rates started to rise. No, I don't know exactly when the "bubble" will burst but we're coming off a "bottom" and not a "top" as in 2007/8. It's a heck of a lot easier to time the housing market than the stock market as moves are much slower in the housing market and it's much, much easier to research.
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Re: Wait and save more, or nab lower interest rate?

Postby MrBigglesworth » Thu Jun 27, 2013 9:58 pm

I do not have a crystal ball, but I too fall into the 'when interest rates rise, the cost of housing will fall' group. I view it as affordability, as you mentioned, you will not be able to afford the current house(s) you are looking at if interest rates rise, you are not the only one in this boat. There is still an abundance of supply in most markets, and as people like you fall out of the affordability race because of high interest rates, sellers will only have one weapon to lure you back in -- lower the price of their house to hit the monthly payment acceptable to you based on the current interest rates.

Best of luck with your decision, I'm sure you will do fine either way.
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Re: Wait and save more, or nab lower interest rate?

Postby johnny531 » Thu Jun 27, 2013 10:14 pm

I've formed a rather contrarian perspective vis a vis the "buy before they rise" meme:

Much like cars, most people make house buying decisions based on their capacity to service the monthly payments, and not on the sticker price. This means that when rates go down, housing prices generally rise to soak up the extra purchasing power those low rates afford. If rates rise significantly from here though, I just don't see how prices can fail to fall, at least in real terms.

I think this suggests that the best theoretical time to buy a house is when interest rates are at their peak, and sticker price is at it's lowest. Interest rates in the first couple years will be painful, but the loan will be smaller (again, at least in real terms), and you'll be able to refinance going forward if rates fall. You'll also have an asset that's more likely to rise in value, buying you future flexibility, rather than risk being underwater if rates rise significantly from where they are today.
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Re: Wait and save more, or nab lower interest rate?

Postby Iorek » Thu Jun 27, 2013 11:20 pm

My own WAG is that home prices, like wages, are "sticky"-- meaning that it takes a lot for people to lower their expectations once they've been set higher. The bubble deflating was enough to get people to eventually lower prices, but I am sceptical that rising interest rates will cause sellers to recalibrate prices to maintain a similar monthly payment for purchasers, at least if inventory is tight (which it is around us).

But then what do I know...
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Re: Wait and save more, or nab lower interest rate?

Postby Whit » Thu Jun 27, 2013 11:56 pm

Don't try timing the market, even the housing market. Home prices could go down, or up. Anyone pretending to have a crystal ball is taking an educated guess at best. If you want to be a homeowner and can put 20% down on a house you love and the house can be bought at a good price that fits easily into your budget, go for it.
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Re: Wait and save more, or nab lower interest rate?

Postby Valuethinker » Fri Jun 28, 2013 7:05 am

Peter Foley wrote:It is all guesswork, but my suggestion and reasoning are as follows:

Put the 20% down and get the mortgage now. I too think interest rates will edge up. In addition, housing prices are on the rise in many markets but certainly off their highs of just a few years ago. You can get a house now for a not unreasonable price at an interest rate that that most boomers like myself thought we would never see. My first purchase was a contract for deed at 8% when interest rates were above 9%. My next house was when rates were in the 11% range.


+1

US housing prices are rising, most areas. Interest rates on home loans likely to go up from here as Fed winds back QE.
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Re: Wait and save more, or nab lower interest rate?

Postby Colorado13 » Fri Jun 28, 2013 11:52 am

MrBigglesworth wrote:....There is still an abundance of supply in most market...


Not in my world. I think your comment is very specific to geographic location (which is why OP's decision can be challenging.) There are shortages in many markets because builders have not added new inventory in recent years. Much of the market in CO is much like hpryder describes in CA - houses on the market for a day or two, multiple offers, and selling above listing price.
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Re: Wait and save more, or nab lower interest rate?

Postby nonnie » Fri Jun 28, 2013 12:31 pm

My realtor just told me about a condo in Rohnert Park, CA--Sonoma County -adjacent to Santa Rosa with a CA state university but not a hot bed of high end or even a super desirable place to live as it's mostly tract house. Condo was priced fairly and in line with recent comps at $275K--it received 32! offers and sold for $350K. My neighbor's kids have been looking for a house for 9 months and have gotten out-bid a dozen times, in some cases $100K over asking on a $450K house. There's no inventory because there's no inventory and folks are loath to put their house on the market because they are afraid they won't find a new one. We bought our house just a little over a year ago @ $467K and comps and actual sales of houses not quite as nice are already $100K more than our.

A good deal of the SF Bay area is very hot right now and has been for over a year-- SF Co, San Mato Co, Santa Clara, Marin, Napa and Sonoma. Yes, this is CA specific but there's no reason to think the pattern wouldn't be the same as always-- as CA goes...

Obviously, the OP market could be different and he/she needs to do the homework.

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Re: Wait and save more, or nab lower interest rate?

Postby grabiner » Fri Jun 28, 2013 8:27 pm

johnny531 wrote:I've formed a rather contrarian perspective vis a vis the "buy before they rise" meme:

Much like cars, most people make house buying decisions based on their capacity to service the monthly payments, and not on the sticker price. This means that when rates go down, housing prices generally rise to soak up the extra purchasing power those low rates afford.


And for houses, unlike cars, this is rational. If your income qualifies you for a mortgage with a $2000 monthly payment, the amount you will be allowed to borrow is $420,000 at 4% interest and $370,000 at 5% interest. With fewer people who are able to buy a house at the same price, the price must fall.
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Re: Wait and save more, or nab lower interest rate?

Postby BestWishes » Fri Jun 28, 2013 9:02 pm

Real estate is all about location, location, location.

As other posters brought up, if you are in CA, prices in general have gone up 20% in the last year. This is not ture in some other areas.

Have you studied your area? What are prices like in your area? How much inventory are there? What kind of house are you looking for?

Some of my favorite real estate web sites, in order: redfin.com, trulia.com, zillow.com

They have a lot of info, redfin has the most up to date house listing and you can check out their sales history.

Buying a home is not just a financial decision but a very personal choice. Go look at houses, if you find one you like, buy it.
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Re: Wait and save more, or nab lower interest rate?

Postby NorCalDad » Sat Jun 29, 2013 11:52 am

YttriumNitrate wrote:
Paddington79 wrote:Right now my primary concern is that interest rates will edge up by the end of 2013, and we'll be hindered enough to rent forever. This is a nerve-wracking thought.


You know, back in 2007 people were thinking almost those exact same thoughts only it was housing prices, not interest rates that were going to be out of their reach in 6-12 months, so they had better buy now.

My biggest lesson from the housing crash was that whenever you get this fear-driven urge to buy, take a deep breath and ignore it. We bought almost 10 years ago thinking we were otherwise going to be renters forever. It was a big mistake. Many friends did the same thing during that period, and many of them would concur that it was a mistake.

Buy when you are ready to buy - when you have enough money for a down payment and an expectation of lengthy ownership. You cannot predict the housing market.
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Re: Wait and save more, or nab lower interest rate?

Postby inbox788 » Sat Jun 29, 2013 6:29 pm

nonnie wrote:
YttriumNitrate wrote:You know, back in 2007 people were thinking almost those exact same thoughts only it was housing prices, not interest rates that were going to be out of their reach in 6-12 months, so they had better buy now.


I don't think this is a good analogy at all. We're in a situation where housing prices hit new lows in 2012 vs. new highs in 2007/2008. The housing bubble then was clear to those who paid attention. That's not to say there will never be another one but prices didn't start to really climb on a national basis until 2013.

http://money.cnn.com/2008/01/29/real_es ... me_prices/


And the home interest rate decline was also crystal clear to those who paid attention. Right now, those paying attention are seeing a new housing boom that will lead to the next housing bubble in exactly 5 years, so everyone sitting on the sidelines should buy before they wind up trying to chase a departing train.

Seriously, no one really knows, especially the timing of any future changes. I'd say it's likely that housing prices will go up, but how fast and how high? Are they related to interest rates? Higher interest rates mean higher or lower housing prices? Some say higher because there are lots of folks sitting on the sidelines waiting to jump in like you. Some say lower because higher interest rates mean less affordable. Some say investors have bought up all the recent housing and are standing by to sell. Others say these investors are making a good return renting out the units and won't ever be selling. Finally, if rates rise too far too fast, and the economy starts to tank again, we might be seeing QE5.
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Re: Wait and save more, or nab lower interest rate?

Postby nonnie » Sun Jun 30, 2013 4:39 pm

grabiner wrote:
johnny531 wrote:I've formed a rather contrarian perspective vis a vis the "buy before they rise" meme:


And for houses, unlike cars, this is rational. If your income qualifies you for a mortgage with a $2000 monthly payment, the amount you will be allowed to borrow is $420,000 at 4% interest and $370,000 at 5% interest. With fewer people who are able to buy a house at the same price, the price must fall.


I believe this depends on the market. In "hot" areas where buyers or investors are buying all cash interest rates don't matter. In hot markets where there are a half dozen or more qualified buyers for each property, all it will do it cut down on the number of offers.

Again, pure speculation and I'm sure I could be wrong but at some point won't banks start easing up on credit and start loaning more money? It's as easy as lowering/loosening up the FICO score tiers to be more in line with the past practices which would then mean instead of needing a 760 FICO score to get the best rate, one would only need 740 and on down the tier . I am NOT advocating this-- just speculating.

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