NUM­BERS GAME

Richmond Times-Dispatch Weekend - - SCOREBOARD - BY PETER G. MILLER Ques­tions — peter@ctwfea­tures.com

Ques­tion: Ev­ery real es­tate bro­ker we meet says now is the time to buy. But is this true? If we wait a few years, we’ll have more for a down pay­ment and will avoid mort­gage in­sur­ance. Does it pay to buy now?

An­swer: If you want to buy a $400,000 house to­day the num­bers might look like this: You pur­chase with FHA fi­nanc­ing and 3.5 per­cent down, the mort­gage rate will be roughly 4.5 per­cent over 30 years. The loan amount will be equal to 96.5 per­cent of the pur­chase price or $386,000.

We could pay the up-front mort­gage in­sur­ance pre­mium in cash—$6,755 in this ex­am­ple—but to save money we add this sum to the loan amount. We now have $392,755 in fi­nanc­ing. The monthly cost for prin­ci­pal and in­ter­est will be $1,990.

The loan re­quires $6,755 for the up-front mort­gage in­sur­ance pre­mium plus $273.42 a month for the life of the mort­gage for the an­nual mort­gage in­sur­ance pre­mium. Af­ter seven years a bor­rower will pay $29,722 for mort­gage in­sur­ance—$6,755 up front plus $22,967 in monthly fees.

Or, you could wait seven years un­til you have 20 per­cent down. Will you save any money by wait­ing seven years with 20 per­cent down and no mort­gage in­sur­ance?

A $400,000 prop­erty with 20 per­cent down re­quires $80,000 up front. That’s what you will need to avoid mort­gage in­sur­ance, and it’s far more than buy­ing with $14,000 for a down pay­ment ($400,000 x 3.5 per­cent).

The first ques­tion is whether a buyer can save $80,000 in seven years. Is this re­al­is­tic? Save $952 a month and the an­swer is yes.

But even if it’s pos­si­ble, we have no way of know­ing if that amount will be suf­fi­cient in seven years. Home prices could rise, and, if they do, $80,000 won’t be suf­fi­cient for a 20 per­cent down pay­ment.

Also, a down pay­ment is not the only is­sue to con­sider. In­ter­est rates might also climb and the home you want might be out of range when you’re ready to pur­chase. Ac­cord­ing to Fred­die Mac, the av­er­age an­nual mort­gage rate be­tween 1971 and 2017 was 8.16 per­cent.

Mean­while, we have not con­sid­ered that seven years of own­er­ship comes with seven years of amor­ti­za­tion. The home­owner will have paid the orig­i­nal debt of $392,755 down to $341,800. That dif­fer­ence of $50,995 is sav­ings, re­gard­less of whether prices rise or fall.

We don’t know which way home prices will move but we know where they are to­day. In your heart of hearts would you rather own or rent for the next few years? It’s a per­sonal pref­er­ence.

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