First time home buyers currently have a historical advantage with both low rates and prices. What happens when the ternd begins to shift?
You might not qualify to purchase the same house.
Unless your income keeps pace with price and/or rate increases, you may not be able to qualify for the same home you could purchase today. In the example above, the income to qualify increases from $4,038 per month to $5,127 (assuming a debt-to-income ratio of 35%). The 27% increase is much higher than the typical salary increase of about 2% or 3% per year.
In a rising market, you usually can’t out-save appreciation.
When prices are rising, it can be difficult for your savings to outpace the market. For example, if a $300,000 home appreciates by 5% in one year, that’s $15,000 or $1,250 per month. Can you add that amount to what you’re already saving each month?
If interest rates are rising, too, required payments and income increase are even more.
Given the recent environment, some may discount the possibility of the 2% increase in the example above, but the 50-year average for a 30-year, fixed-rate conventional loan is approximately 8.375%. That’s almost 4% higher than rates at the time of this writing and would equate to a payment increase of more than $663 per month in the examply.
Qualified borrowers have the ability to lock in today’s prices and rates. Buyers who have not yet accumulated a large down payment may find that using a small down payment and paying mortgage insurance is wiser than missing out on low prices and historically low rates.
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Accumulating equity and earning appreciation take time. Consider, too, the cost of maintenance and repairs. However, especially once the value of what you would have otherwise paid in rent is factored in, it’s clear that owning a home can be a great way to build rather than to expend your wealth. And it’s also clear that the true cost is typically far less than what you might write on a check each month.
Note: This scenario is just an example and is not intended to reflect the current market or forecast for rates, prices, taxes or insurance. All of these factors are subject to continual change.