Buy Now or Pay More Later?

“Real Estate segment with our Residential Expert Cheryl Marlow!”

A recent article on Realtor.com by Brian O’Connell raises a lot of questions. So, today I wanted to ask our listeners: would you rather buy a home now, or pay more later? With mortgage rates inching towards 5% as this year draws to a close, potential home buyers have some decisions to make – and soon. A laundry list of economic issues, including inflation, consumer credit, and rising home prices has the U.S. housing market on the way to making a clean break from the days of the 3.5%, 30-year fixed-rate mortgage for the foreseeable future. The danger isn't that mortgage rates are nearing 5%; the real threat is that rates could go higher, to 5.5% or even 6% in 2014.

Can you give an example as to why there’s such danger?

Think of it this way: say a buyer snares a $300,000 fixed-rate, 30-year mortgage at 5% interest rate with the following payments: monthly payment of $1,610.46, total payment of $579,569.69, and total interest of $279,769.69. Another buyer grabs the same mortgage at 6% interest rate, they have the following payments: monthly payment of $1,798.65, total payment of $647,515.44, and total interest of $347,515.44. The buyer with 6% interest pays more almost $200 more per month and approximately $67,746 total compared to the buyer with 5% interest.

Wow, that’s an incredible difference!

It sure is! The Federal Reserve has embraced a policy of low interest rates since the real estate tsunami hit, primarily by buying up securities in the U.S. mortgage market. Experts say the Fed will soon be pulling out of their mortgage backed securities purchasing program thus driving interest rates up even higher. Rates in the 3% range are gone forever.

What are rates at now?

Rates are currently at 4.25%. While rates have been in decline the last few weeks, the big picture shows a general rise in rates to 4.5% before the end of 2013. Which raises the question for potential homebuyers: should you jump off the fence now, with rates still fairly reasonable, or do you wait and risk having to pay significantly more with mortgage rates as potentially high as 5-6% in the next year?

Give us your thoughts below!