Uncategorized March 3, 2014

Should you buy your new home now or later?

Last month, the Federal Reserve, in a unanimous vote, decided to further decrease its bond purchasing. The bond purchases were the government’s stimulus package created to keep long term mortgage interest rates artificially low in order to help drive the housing market. Most experts believe that tapering will cause interest rates to increase as we move through the year.

Interest rates have remained relatively stable since the onset of the tapering in December. This is probably because the first round of increases had already been ‘priced into’ the equation last summer when rates skyrocketed by over a full percentage point just on the speculation that tapering would take place later in 2013.

However, as we move forward, most analysts believe rates will start to rise culminating in a rate close to a full percentage point higher than current rates by this time next year. For example, Freddie Mac, Fannie Mae, The Mortgage Bankers’ Association and the National Association of Realtors have all recently projected rates to be between 5-5.5% at this time next year.

Bottom Line

If you are a first time buyer or a move-up buyer, the cost of the mortgage on your new home will probably increase as we move through the year. If the timing makes sense, buying sooner rather than later may save you a substantial amount of money over the long term in lower mortgage payments. Here’s how it works. A 4.5% mortgage rates on a home purchase of say $800,000 with 20% down (financing $640,000) your mortgage payment would likely be around $3,243 per month. If the mortgage rate increases to 5.5% by the end of the year you would be paying $3,634/month.  That is an increase of $391/month or $4,692 per year in principle and interest payments without factoring in a 5-10% increase in home values in the Bay Area. Just a note: over the last year, home prices in Silicon Valley increase over 20% so your $800,000 priced home could now be $960,000 increasing your monthly mortgage payment even more.