Lets look first at what we know FOR SURE without any bias added to the equation. We know that since 1972, the average 30 year fixed rate mortgage came with a little over 1% origination fee and an interest rate of 9.04%. Compare that to today's best execution of mid 4% up to 5% range (depending on what time of day you check....) and you know that 9.05% > 5%. That's something any 2nd grader can tell you. Not to mention that the high end of today's rates is with 0% origination so that's another big chunk of savings compared to the averages.
Second, looking back just prior the mortgage meltdown that started in the late summer of 2007. The government stepped in with their Mortgage Backed Securities purchase program announced late '08 and starting in January of 2009. The average 30 year mortgage between '06 and the end of '08 was 6.29% compared to the average of 4.92% from 1/2009 through present day. Again, the 2nd grader knows that "6.29% > 4.97%" and the bottom line that these two points of interest show, long term money to purchase a large, appreciating asset is on sale.
Third point that falls under the "fact" column is another big one. It's no secret that home values have dropped. Somewhere between 10% and 20% depending on what type of home it is and where that home is located. So lets use the low end of that for this post and just say home prices are down 10%. That's no good for anyone ordering appraisals to refinance but lets spin it in a positive direction and still state the facts. "Homes are currently 10% off." Any one who is a bargain shopper knows that a sale is always a good thing.
Breaking this down using the low end of the average mortgage rate (6.29% average of '06-'08) and the low end of the discount on homes, 10%, lets just look at the 5 year time frame for added net worth.
Buying a home for $250,000 with a 20% down payment.
* Down payment = $50,000 at closing.
* $200,000 loan amount at 6.29% on a 30 year fixed rate mortgage = $1,236/mo.
* $1,236 x 60 months = $74,160 total payments.
* Balance in 5 years = $187,019
* $50k down payment + $74,160 total monthly payments over 5 years = $124,160 total invested.
* 2% appreciation per year would roughly be a value of $276,00 after 5 years.
** Balance of $187,019 subtracted from value = $88,981 of equity in the home.
In today's market, that same home discounted by 10% = $225,000 purchase price.
Using the same info as above as far as structure.
* $45,000 = 20% down payment.
* $180,000 loan amount at 4.92% = $957.50/mo
* payment x 60 = $57,450 total of payments.
* $165,382 = balance in 5 years.
* $45k down payment + $57,450 total of payments = $102,450 total cash investment.
* Since it's the same house, for the sake of comparison, the house is still worth $276,000. There has to be a period of "over-appreciation" in a short time frame to compensate for the current discount. Here is where most potential buyers would leave out a very key ingredient. You have to assume this in order to keep it as an accurate comparison. If you want to assume 0% appreciation, then the $250k number is used for both scenarios and the numbers still work!
* $110,618 total equity in property.
Summary is obvious at this point.....
$124,160 total investment from the first scenario - $102,450 from the second = $21,710 SAVED.
$110,618 equity in 2nd scenario - $88,981 from the first = $21,637 in additional assets.
$21,710 savings + $21,637 additional assets accumulated = $43,347 total benefit.
So the bottom line is that you have put in your pocket or kept in your pocket $43,347 over only 5 years by making the decision to purchase now rather than later when market conditions normalize.
When the economy recovers the government will lift the artificial cap on interest rates pushing them back to more "normal" or average rates.
When the economy recovers, unemployment will go down which means people will be working. History tells us that unemployment rates and the housing market directly impact one another so when people are back to work and making money, they are buying houses and pushing the demand up. High school economics was where we all learned the law of supply and demand so we know that when employment starts to build up steam, demand for housing will increase, when the demand increases, the price will too.
Bottom line is that we're starting to see faint signs of recovery and with the recovery the sale ends on both housing and on the price of money.
The window is starting to close, do you want to look back on today in 5 years and say "I wish I had $43,347 in my pocket right now" or do you want to look back and take pride in the fact you saw opportunity and you jumped on it?
Why wait? Lets get it going!!
