I recently posted an article titled "When Is the Right Time to Buy in San Diego?", a question I get asked all the time from potential clients. In that post, I discuss why this is a complex question, and provide some tips to help you decide if now is the right time for you to embark on the adventure of buying a home in San Diego.
In this post, I’ll talk a little bit more about how to make that decision, using some solid numbers that paint a picture of how changing home values and interest rates can impact your monthly mortgage payments.
Let’s take the case of a family looking to buy an $800,000 home with $400,000 down and a $400,000 loan. Since interest rates are currently around 3.5% for a 30-year fixed rate mortgage, this means that their monthly mortgage payment would be about $1,796 per month.
Now let’s say that the same family decides to put their home search on hold for 3-4 years because they believe we are at the top of a home value curve and prices will be lower in a few years. By waiting 3-4 years, let’s assume that they are able to buy a similar home for only $750,000 instead of $800,000.
However, 3-4 years from now, let’s assume that interest rates have also climbed back to a more normal range, around 5.5% (which is still a historically low interest rate for mortgage loans). Here are two ways our family could respond:
They could put the same amount down ($400,000) and take a smaller loan ($350,000). This would raise their monthly mortgage payment to $1,987, so even though they are buying the home for $50,000 less than they’d pay today, they will pay almost $200 more per month on their mortgage.
They could put $50,000 less down and still get a $400,000 mortgage, keeping that extra $50,000 in the bank. With this option, their monthly payment would jump to about $2,279, almost $500 more per month than they’d pay today.
Alternatively, what if four years from now, the $800,000 home is worth only $600,000? If our family puts $400,000 down, they would now only need a $200,000 loan and their monthly payment would be about $1,264 per month, saving them around $500 per month. But they would have been paying rent for the past four years rather than paying money toward their mortgage, meaning that they would have an extra four years left on their 30 year mortgage. Let’s assume that their rent over the past four years was around $1,700 per month; taking into account the extra four years of the $1,264/month mortgage payment that they would be paying if they waited to buy, they would actually end up paying only about $60,000 more over the course of the 30 year mortgage if they bought today at the “presumably” higher price.
As I discussed in Part I of this post, it’s hard to predict where home values will be a few years from now, but I would expect that home prices will hit a high point somewhere in the next 1-5 years. At that point, history suggests that we will begin a cycle of falling home values for about the next 5 years or so. As for what interest rates will look like in 3-4 years, that can be even more difficult to predict.
Deciding when to buy a home, how much to put down, and how big of a loan to take out depends on your unique financial situation and long-term goals. It’s the right time to buy when you can afford it, when you find a home you love in your price range, and when you have a long-term plan for the home. If all of these pieces of the puzzle are in place for you now, then you may want to consider buying now, regardless of what is going on with interest rates and home values. At the end of the day, you need a place to live - whether that means spending money on buying a home or on renting. if your long-term plan is to own a home in San Diego, and if all of these other factors line up, there is no bad time to buy in San Diego.
If this is the case, I recommend that we meet for a Buyer Strategy session in which we can discuss your specific situation, what you’re looking for in a home, and how I can help you.
Exclusive Buyer Agentsdo not list homes for sale and never represent sellers. They have no "inventory" to try to sell you. They can represent you in purchasing any home. They are specialists at representing buyers only on the buyers' side of the transaction. Exclusive Buyer Agents work to get buyers the best price and terms when they buy a home.
If you have excellent credit and plan to buy a home or condo in San Diego County within 90 days, contact Justin Gramm to hire an agent on your side of the transaction. More about Justin Gramm on Google+. Call Justin at (858) 437-2662 or E-mail.