Why Marry The House, Date the Rate - Makes NO Sense
Ok Ok... slow down, you may have seen this cute slogan blasted all over social media over the last two months from agents looking to drum up business, but let's go over the math in an example.
In some cases, the slogan may make sense, in many cases, it won't - and what it suggests won't even be possible for others.
Like all things in life: it depends.
The market has changed. And when it changes, what matters? Numbers. Profit. So let's break it down. Let's run the numbers against current market expectations.
The Assumptions.
If you buy a house for $400,000 today and put 20% down ($80,000), you'll have a $320,000 loan balance. Let's say you locked in a great rate of 6.5%. With these inputs your monthly payment would be approximately $2,675 (including taxes and insurance).
Private Mortgage Insurance.
You saved up and put 20% down (80% LTV) on your mortgage so you could waive private mortgage insurance (PMI). Your mortgage insurance that you avoided ranges from 0.58% to 1.85% depending on your credit score, loan-to-value (LTV) ratio, and debt-to-income (DTI) ratio. So let's just meet in the middle and say your PMI is 1%.
Housing Price Expectations.
Now, the base case for most economists is that home prices will drop 10-15% in 2023 due to rising interest rates, which destroys buyer demand, and causes listings to stack up on the market. more supply = more competition = lower prices. This could mean if you buy a house today for $400,000, it's very likely it could be worth $360,000 next year (let's assume 10% less). Your principal pay down over your first year was only $3,576. Meaning you lost net equity of $36,424.
The Costs of Refi & PMI
Now let's say that mortgage rates also went down from 6.5% to 5.0% (unlikely but possible) and you try to refinance your interest rate in late 2023 or 2024. You now have to pay 2% in closing costs again to complete the refinance, which is $6,400. Your new monthly payment is $2,348, a good $327 less in a monthly payment, BUT now since your house is worth less, during your refinance you found out you have to either bring $36,424 to the table to make the LTV 80% to avoid the PMI again or actually pay the PMI, which is $266 per month.
If you don't have the money to bring to the table to close the refi, tough luck, your new PMI from your refi has eaten up 81% of your savings from the refinance. It still helps - but you have to pay the closing costs again to refinance. If you do have the money to refinance plus pay the closing costs, good for you.
Most Americans do not have $36,424 (equity loss) plus $6,400 in closing costs to bring to the table to lower their monthly payment by $327 per month. And, even so, most people wouldn't pay this money out of pocket to change the payments by that amount.
Plus, in 2023-2024 we should be in a recession, many people who are buying now could be losing their jobs, or get higher DTIs, making it hard to refinance at all. And keep in mind, when you buy a house in a rising market, your monthly payment will often be higher the second year after you purchase it due to the tax assessor marking the property to market.
That's why it's so important to not just buy into the headlines, but to get together with a seasoned agent who can run numbers and set your family up for long-term success based on your individual circumstance. For now, block out the noise, avoid the cute slogans and pretty pictures, and instead sharpen your pencil and see what will really make the difference.
THINK BIG, QUESTION EVERYTHING. Contact Jon @ jon@movewithmomentum.com for more information.
**Closing Fees May Be Less. Keep in mind the article makes assumptions. Some lenders may choose to take less profit on the refinance and/or some loans will receive appraisal waivers, so the cost to refinance could be less than 2% in some cases. Generally, mortgage rates will need to go down 1-1.5% from your current rate to make it make sense to refinance.
***Low Down Payment Buyers Could Be Underwater and Not Eligible to Refi. I did not address those buyers who put 3-5% down payments and who already pay PMI because if the market drops 10%+ next year, I'm just assuming they won't be able to refinance at all because they won't have the funds to make up the difference. Their loan will be underwater (i.e. the value of the home will be less than the loan amount).
