Last week we weighed the question of buying now or later. Focusing on both increased interest rates and cost to buy, we came to the conclusion that this heavily relies on the market in which you wish to reside. While some markets anticipate substantial cost increases other's anticipate less drastic effects.
This week, we are digging a little deeper. Is 2014 the year to buy a first home or new home? Well, there are two variables to consider:
Interest Rates
Affordability
Interest rates are on the rise. This year's average interest rate is 4.5 percent whereas last year's average was 3.5 percent. Of course, we expect interest rates to continue to rise as the housing market improves.
With that said, what is the actual impact homeowners face when interest rates increase? Let's break it down simply. Take a look at this table that breaks down the total cost of a $250,000 home after interest (provided by The Motley Fool):
The results are astonishing! Buying now, and putting down 20%, a homeowner would save a little over $200,000 compared to paying the average historical rate. In essence, the homeowner could invest in another home with that savings.
Now, what exactly do we mean by affordability? This index value is calculated by using variables such as mortgage rates, housing values and income data. Basically, the higher the value the more able a family is to afford a median priced home. For example, a reading of 145 means that a family with a median income has 45% more earnings than necessary to afford a median priced home. On the other hand, a reading of 70 would suggest that a family makes 30% less than what's needed to afford a median priced home.
Where is affordability headed? Unfortunately for the buyer, affordability is headed downward. Like we discussed last week, mortgage rates are expected to increase and so are housing prices. Again, this means higher cost and less flex room in a family budget.
All in all, what it comes down to is that rising interest rates and rising home prices will lead to less affordability for families. We are not telling you that you must go out and purchase a home right now. However, if you found a home and you are unsure of whether or not to proceed perhaps you should take this into consideration.
Sources: USA Today
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