Do not save what is left after spending, but spend what is left after saving
— Warren Buffet

Knowing when is the right time to do something life-changing can be a daunting challenge. Especially when it comes to decisions that can have a profound financial impact on you and your family for many years to come. For most of us, I think it’s fair to say that we wish to leave a legacy of sound fiscal stewardship and monetary blessing for our children or other loved ones who follow.

NOW_LATER_NEVER_dice

I’m also quite certain that we’d all like to feel as though we did the wise thing in terms of ‘buying right’ when purchasing a home. There are so many variables, so many questions when faced with this decision.

In today’s post, I’d like to clearly address one of the more common buyer dilemmas that is particularly applicable in today’s home-buying environment.

"I know mortgage rates are low right now, but I've heard we're in another housing bubble...  Maybe we should wait for prices to come down."

Let’s look at some real numbers within several different scenarios. I believe these illustrations will help in making a prudent decision as to whether buying now or waiting makes sense. In order to be realistic, we’re going to use real-time prevailing rates as of the time of this writing and average prices based upon my local real estate market which happens to be Riverside County in Southern California.

Following will be the baseline for our scenarios:

Loan type - Conforming Fannie Mae Conventional Loan • Down Payment - 5% Down • Loan Term - 30 Year Fixed Rate • Mortgage Insurance - Yes

Let’s set the stage for Scenario #1:

SCENARIO_1
SCENARIO_1

As noted below, over the full term of the loan, Scenario #1 would result in the total of principal and interest payments of $504,729 and change…

TIL_scenario_1
TIL_scenario_1

Now, let’s set the stage for Scenario #2. We’re going to assume that the decision was made to wait out the ‘bubble’ for 6 months and hallelujah!  indeed prices went down over 8% to $275,000.00 (unlikely in a recovering housing market). Nevertheless, we saved $25,000 in purchase price, but alas!  interest rates went up by one full percentage point in just a couple of months! If you don’t think this is likely to happen, it just did. From May to August 2013, interest rates went up at least 1.0%. So here’s what Scenario #2 looks like:

SCENARIO_2
SCENARIO_2

Over the full term of the loan, Scenario #2 would result in the total of principal and interest payments of $519,348 and change. Can you see we have a problem here??

TIL_scenario_2
TIL_scenario_2

Let’s take it one step further with Scenario #3, our final scenario. While it is unlikely, it is certainly feasible. Here, we’re going to assume that instead of prices coming down only 8%, they went down a full 10%. So we’re saving $30,000.00 in purchase price rather than $25,000.00 but we waited out the ‘bubble’ for 10 months instead of 6 months and mortgage rates spiked by 2.0% rather than just 1.0%. As I said, perhaps unlikely but feasible in such uncertain times as these. Here’s what Scenario #3 looks like:

SCENARIO_3
SCENARIO_3

This time, over the full term of the loan, Scenario #3 would result in the total of principal and interest payments of $568,556 and change. Now we have a big problem! We “Saved a nickel and spent a dime!”

TIL_scenario_3
TIL_scenario_3

To sum things up, I want to mention one final note. We talked about total principal and interest payments over the life of the loan, but I purposely didn’t mention anything about the difference in total interest alone. I saved that little nugget of information for last (for drama of course :o). Take a look below at the difference of actual interest paid between Scenarios 1 through 3:

TIL_scenario_1_interest
TIL_scenario_1_interest
TIL_scenario_2_interest
TIL_scenario_2_interest
TIL_scenario_3_interest
TIL_scenario_3_interest

There you have it… The difference in interest paid between Scenarios 1 and 2 is $38,369 and $92,327 between Scenarios 1 and 3!!  Furthermore, the difference in monthly payment is nearly $200.00 more per month in Scenario #3 even though we're borrowing less money!

They say that good things come to those who wait. I would say that’s probably true most of the time. But sometimes it’s a bit of a gamble to say the least. I guess the question then is “Do you feel lucky… Well, do ya?”

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