What You Lose When Saving

This is taken from an edition of Priority Pulse that I wrote almost four years ago.  You may think I’m doing this because I’m lazy or I spent the weekend doing something other than think about what to write for this week’s edition – and you’d be right on both counts – but this is something that needs to be repeated.  In fact, it’s something that we (real estate agents and mortgage folks alike) should be screaming from the rooftops.

Buckle up and get ready to have your mind blown! Okay, it’s not THAT mind blowing – some of you might even say, “well, duh” – but it’s still interesting.

The New York Federal Reserve’s economists recently published the results of a study: 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

Here’s what we should be putting in front of those folks who are sitting of the fence.  Right now, rates for an FHA loan are almost 1% lower than a conventional loan.  Even with mortgage insurance, waiting to save a 20% down payment as opposed to 3.5% will cost a buyer A GREAT DEAL.   Take a look at the numbers for a house with the purchase price of $200,000 with a 30-year fixed mortgage:

WAIT
$40,000 down payment
Total Loan Amt: $160,000
Interest Rate: 4.875%
Monthly Mortgage (P&I): $858.91

versus

BUY NOW
$7,000 down payment (3.5%)
Total Loan Amt: $193,000
Interest Rate: 3.875%
Monthly Mortgage (P&I) + Mortgage Insurance: $1059.03

No doubt $858.91 is better than $1059.03 for a monthly payment – that’s not what’s at stake here. The difference between those two payments is $200.12. In order for a person to save the additional $33,000 to go from a 3.5% down payment to a 20% down payment at the rate of $200.12/month, it would take just under 165 months – 13.75 years! – to get to that point, which is almost half the life of a 30-year mortgage.

For many prospective buyers, that additional $200 is significant, no doubt.  I’m not in favor of pressuring these folks into doing something that makes them feel uncomfortable, even if I think it’s in their best interest.  However, I would add this: in 13.75 years, where do you think interest rates will be for a 30-year mortgage, and will the type of house you want to buy still only cost $200,000?  Food for thought.

downpayment, mortgage, nowvslater, prioritylending, realestate

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