One of the things I hear from clients who get frustrated with house hunting is, maybe I’ll just rent and start again next year when the market calms down. While I agree that house hunting and not getting your offers selected can be exhausting, both emotionally and physically, and demoralizing. Here’s why you should take a mental health break, albeit short, and then get on the hunt.
Real Estate is always increasing in value.
ALWAYS.
And the sooner you buy the sooner you will start adding that wealth to your family and not adding to someone else’s wealth.
A Disclaimer and What we will be used for numbers: The disclaimer is that I will be using historic numbers, and historic being a 40-year moving average, for the Denver metro area. Denver does have a unique real estate market due to our climate, our three hundred plus sunny days, and our amazing outdoor, sporting, and cultural activities. Not to mention shopping, shopping, and shopping.
For numbers I will be using a purchase price of $425,000 and that you paying $2,350 a month in rent. Also, as the sample borrower, you make $67,000 a year and have no debt other than your rent/proposed mortgage payment.
If you wait 12 months to purchase you will have thrown $28,200 in rent towards someone else’s wealth and mortgage.
Currently, the debt to income with this sample income and rental debt is 42.09%.
At today’s common interest rate and putting 20% down as well as averages for property taxes and homeowners insurance gets a potential mortgage payment of $1,861 a month. In this first year of homeownership, you will pay $22,232 in total mortgage payments. Straight away you’ve saved $5,868 or $489 per month. Of these total mortgage payments, you will have paid $6,807 towards your principal loan balance. Add this to your year of savings with the lower mortgage payment and you are at estimated savings of $12,675 for the year or $1,056.25 per month towards your total long-term wealth. Of course, your new home has also appreciated in value over this time. Our forty-year appreciation average in the Denver metro is 7.25%. Over the 12 months you have owed your new $425,000 home it has appreciated by $30,812.50.
Property Appreciation over months
In summary, in the 12 months, you have owned this home you’ve added $43,487.50 worth of wealth to your family. (Assuming, of course, you don’t spend your monthly savings). Now, you could just spend the safe $28,200 in rent or you can get your long-term wealth on track.
Finally, and this is an important piece, your debt to income went down from 42.09% to 33.33% so they would be living much more comfortably.
Now, let’s wait 12 months and see where you would stand.
Interest rates will probably be 1/2% higher.
The purchase price will now have increased by $30,812.50 so the new purchase price will be $455,812.50.
The required cash down will have increased from $85,000 to $91,162.50 (keeping 20% down)
On the upside your income would probably increase from $67,000 to $69,345, assuming a 3.5% rate of inflation raise.
Your DTI on the mortgage now would be 34.92% which is higher than the 33.33% if you would have purchased last year. Your monthly mortgage went from a proposed $1,861 if you purchased last year to $2,018 this year or a difference of $157 per month more. Not a lot on a monthly basis but over 30 years that’s $56,520 more plus the $30,812.50 of equity that you lost by waiting is a difference of $87,332.50.
While you may have to wait due to your specific situation, if you are waiting just because you are emotionally exhausted by looking and coming up short, you are losing out on your long-term wealth.
Finally, and for the most depressing number of all, if you take the $30,812.50 of property appreciation and average a 7.25% equity gain over thirty years you’ve lost out on a total of $251,559 in long term wealth and increased equity.
Add the extra twelve months of rent you paid and the additional $157 per month over the life of the mortgage and you have cost your family $336,279 in total wealth at the end of 30 years.
The moral of the story. Don’t wait another day, if you can buy today, buy today.