Run, Don't Walk!

Full disclosure: this is a reprint from a few years back – I’ve updated the numbers to reflect the conditions occurring in the market today. 

The New York Federal Reserve’s economists conducted a study and published the results: 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 you 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 you a push. Take a look at the numbers for a house with the purchase price of $250,000 with a 30-year fixed mortgage: (1) WAIT: $50,000 down payment, $200,000 total loan amount, 4.5% interest rate, monthly mortgage (P&I) payment - $1013.37; OR, (2) BUY NOW: $12,500 down payment, $237,500 total loan amount, 4.875% interest rate, monthly mortgage (P&A) payment - $1256.86.

No doubt $1013.37 is better than $1256.86 for a monthly payment – that’s not what’s at stake here. The difference between those two payments is $243.49. In order for a person to save the additional $37,500 to go from a 5% down payment to a 20% down payment at the rate of $243.49/month, it would take 154 months – 12 years and 10 months! – to get to that point, which is almost half the life of a 30-year mortgage. Obviously, for many perspective buyers, that additional $244issignificant. Wehave a number of strategies to help make up that difference so you can get into a home as soon as possible!

When this was originally written, interest rates were fairly steady –even stagnant –so the scenario of waiting to amass a larger down payment to get a better interest rate was much more plausible. As we’ve seen recently, though, rates are not going to be stagnant –this is not a pronouncement that they’re going to skyrocket overnight –so this has taken on a greater sense of immediacy to get into a home rather than sitting on the rental sidelines for who knows how long.