One thing I love about the mortgage business is that numbers never lie. Yet, so many prospective home buyers I meet end up making critical judgment errors based on faulty assumptions and faulty math. I want to make absolutely sure you do not fall into these traps, so, let’s debunk this common theory!
Theory: Waiting to purchase a home in hopes of a drop in purchase price is always a good idea.
Reality: Sometimes this strategy pays off. Many times, it financially backfires.
So, how do you know which approach is correct? For starters, let’s take a look at the sample scenario below –
Brad and Angelina found their dream home and were confident the seller would accept $200,000 for it. However, they decided to continue negotiating over the next 90 days in hopes of saving on the purchase price. Sure enough, they were right – and settled at $195,000 – a $5,000 savings. Meanwhile, over that 90 day period, mortgage rates rose by a full point. Assuming Brad and Angelina financed $180,000 in either scenario and planned to live in the home for 20 years, which of the following choices is correct?
A: They made the right decision and saved money long term.
B: They basically broke even financially long term.
C: Those 90 days cost them thousands more over the long term.
The correct answer is C! Let’s review some simplified math to see how we came to that answer. Most importantly, Brad and Angelina’s monthly payment increases $106.93 as a result of the one point increase in rate. Assuming they’re going to live in the home for 20 years (240 months), we determine that they’re going to spend an additional $25,663.20 on their mortgage over the long run. In fairness, we need to subtract the initial $5,000 they saved up front – which gives us the bottom line figure of $20,663.20. That’s how much Brad and Angelina’s decision cost them.
While there are other financial and philosophical variables that go into this type of analysis, waiting to buy your dream home in hopes of a price drop may end up costing you more in the long run. If you’re wondering which approach is right for you, I’d be happy to spend some time reviewing your long term objectives to help you find the right strategy for your situation! Contact me today to get started.