Now is a great time to buy!

Shoud You Buy a House  NOW?

With prices increasing in the DC area for several years now, and many buyers being priced out of some neighborhoods, buyers are asking us daily, should I just wait out the market?  Is now the right time to buy?  Well, putting aside the philosophical question  if it is a wise idea to ask a surgeon if you should get a surgery...  Let me explain the most important reason you should buy now!

Low Interest Rates
Interest rates today have (almost) never been lower.  If you have good credit and a decent downpayment you can borrow money at a rate lower than most countries... Really!  look it up.

Let's do the math:
If you purchase a home today and finance a $500,000 mortgage with a 30 year, fixed loan at 3.75%, the principal and interest payment would be about $2,316 per month. If you wait to purchase, interest rates will most likely rise above today’s historically low rates.  I know, I know, I know.. interest rates have only been going down for the last 6 years so why would they start going back up?  Well, Japan not withstanding, there is a limit to how much lower they can go and it seems like people much smarter than us (Fed Chair..) are saying that we should expect interest rates to start rising by the middle of this year.  Now, let's say that interest rate rise to 5.25%, in the next two years (entirely possible), under the same $500,000 mortgage the principal and interest payment would rise to about $2,761 per month.

The difference between these two loans is $445 per month. Over the life of the loan, you would be paying an extra $160,200 in interest on the same mortgage amount.  Worth repeating: One hundred and sixty thousand dollars more on the same exact mortgage amount! 

But what if house prices go down?  Let's try that. using the same example, what would happen if the real estate market started going down to the extent that you could purchase the same home and only need to finance $450,000 at 5.25%? The principal and interest payment would be $2,485 – a monthly payment still higher than if you purchased a more expensive home at today’s low rates or $60,840 more over the life of the loan.

Tax Savings
I'm not a tax guy, and I know the tax code may change (although the National Association  of Realtors will vigorously fight any change to the deductibility of mortgage interst), but here is the general idea as it exists today:  With the $500,000, 3.75% loan (you can get today with good credit and sizeable down payment) , the  interest paid on average over the life of the loan is $11,125.33 per year. If you are in a 35% tax bracket, your Federal tax savings from interest would be $3,894 per year. If your state/DC tax bracket is 10% that would be an additional savings of $1,113 per year for a total tax savings of $5,007 per year or $417.25 per month.  Cool.

Better than renting/ Forced savings
Still not convinced?  Let's try the unlikely event that the home you finance for $500,000 today does not appreciate over the next 30 years at all, you would still obtain a significant amount of equity build-up with each mortgage payment. On average over the life of a $500,000, 30 year fully amortized loan, the equity build-up equates to $16,666 per year or $1,389 per month.

With the combined total from tax savings of $417.25 plus the equity build-up of $1,389 per month, you are losing approximately $1,806  per month by doing nothing.

What are you waiting for? Turn off the internet and let's go look at some houses!