Is Waiting for Lower Interest Rates the Best Home Buying Strategy?
The decision to buy a home is often influenced by many variables, one of which is interest rates. It's common for potential homebuyers to hold off on purchasing a property in anticipation of lower rates. However, does waiting for these lower interest rates really provide the best bang for your buck? The answer isn't as straightforward as it might seem.
The Dilemma of Variable Property Values
A crucial factor in the 'waiting game' strategy is the assumption that property values remain constant. In reality, housing prices are a moving target, often trending upward. For instance, let's examine the housing statistics from Sacramento County in May 2023. The median sales price, which reflects the middle point of all sales prices, rose by 4.1% from $515,000 to $536,000. So, while you're playing the waiting game for interest rates to decrease, the prices of your dream home might be heading in the opposite direction.
A Tale of Two Homebuyers
To bring this point home, let's look at two homebuyers with different strategies using the housing data above.
Buyer One: Let's assume this person didn't hesitate and bought their home last month at $515,000. Although the interest rate was a bit steep at 6.388%, their total monthly payment tallied up to $4,060. This includes taxes, homeowners insurance, and mortgage insurance.
Buyer Two: This individual decided to bide their time for interest rates to dip. By the time they bought their home let's say at a lower interest rate of 5.800%, the price had already swelled to $536,000. As a result, their total monthly payment is not far off from Buyer One's, rounding up to about $4,026.
THE CATCHER: When interest rates finally dropped, Buyer One refinanced their mortgage, bringing their monthly payment down to $3,871. That's a hefty saving of $189 every month when compared to Buyer Two. But the benefits don't stop there.
Early Bird Catches the Equity
Aside from the lower monthly payments, there's another significant perk of buying earlier. Buyer One started building equity in their home sooner. Despite the slightly higher initial interest rate, they've gained 4% equity in their home. This increase in home equity more than compensates for the initial $200 a month difference between their original payment and the refinanced amount.
The Waiting Game Isn't Always Winning
The tale of these two homebuyers illustrates that playing the waiting game doesn't always ensure savings. In fact, there's a good chance you could be losing out on accumulating wealth. While it might be tempting to hold off on purchasing a home until interest rates decrease, this strategy doesn't take into account the likelihood of rising property values and the potential to build equity sooner.
So, if you're considering buying a home, remember that the right time to buy might be sooner than you think. After all, there are more variables at play than just interest rates.
The Sacramento Association of REALTORS® is a professional association representing over 7,300 real estate professionals doing business in the greater Sacramento metropolitan area. All SAR statistics reports compiled by Tony Vicari, SAR Director of Communications. Statistics are derived from the MetroList® MLS database for Sacramento County and the City of West Sacramento.