Why should you buy DC real estate now, instead of waiting for spring 2019?

The median sold price of DC real estate has consistently risen and is projected to further increase between 3.80% to 4.2% in 2019. Popular home types, price points, and trending neighborhoods will see even higher increases. Higher prices result in increased down payment, closing costs and mortgage payments. Higher prices can push you into a Jumbo loan ($679,650+) that carries a higher interest rate still.

Now let’s factor in the cost of rising mortgage interest rates, because higher rates also mean more Interest and less buying power.

Rates are predicted to increase by an additional quarter point by December 31, 2018 and the Fed plans three more rate hikes in 2019. Today’s rate of 4.85% percent can become 5.85% by this time next year.

Doesn’t sound like much? A one point increase has a greater impact on home buyers than most realize. That single point increase can cost borrowers up to 23% more in interest over the life of a typical 30 year mortgage. For loans of  $400k and higher, that extra interest could add up to more than $100k over the life of the loan. Staggering, isn’t it?

  1. Use an online mortgage calculator with an amortization feature to determine your target monthly payment;
  2. Once you have the totals, make a note of them, then repeat the process, increasing the interest rate by one point;
  3. Multiply the monthly payment for each set by 12 to determine the amount of the annual payment;
  4. Subtract the total amount of interest paid at the lower interest rate from the total interest paid at the higher interest rate.

Example: A $250k purchase price with $200k, 30-year, fixed-rate mortgage:

Why Buy DC Real Estate Now
And we know that the majority of buyers in DC will be purchasing well above that price point. The median home price in DC in 2018 fluctuated between $532,500 and $590k. Do that math!

Lenders are using these calculations, too. When your interest rate goes up, it adjusts your highest approvable purchase price downward. You’ll qualify for less home and pay more for it.

What is a debt-to-income ratio?

Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.

Conforming Fannie and Freddie Mac loan rules say that a buyer’s front-end ratio can’t exceed 28% of income.

To determine the front-end ration in the example we illustrated above, divide the total annual payment by 0.28 (28%) for the total amount of income required for the borrower to qualify.

A borrower who makes $45,129 annually in 2018 would have to make $50,443 the following year to qualify at the increased interest rate for the same $200k loan amount in 2019, provided their backend ratio doesn’t exceed 40% of their income. If it does, the buyer would have to reduce their loan amount and, subsequently, the price of the home they wish to purchase.

Getting back to interest, in this scenario the difference in total interest paid over the life of the loan is $44,773 ($223,839 – $179,066) or approximately 23% of the entire loan amount.

Going further, as the Fed might, if rates increase two points, from 4.83% to 6.83%, your total interest paid over the life of a 30 year mortgage of $200k mortgage is $270,825., or an additional $91,759 in interest. A whopping 46% of the loan amount.

Interest rates should be of concern even if you don’t plan to retain the loan for the full 30 years. At first, your mortgage payment will be primarily interest, with a small amount of principal included. Over time, the principal portion of the payment increases, and the interest portion decreases. Here’s how it works. You increase principal payment sooner with a lower rate, so when you decide to sell, you’ll realize a greater net profit.

This illustrates the effect timing of your DC real estate purchase can have on your wallet.

The late fall and early winter months can be ideal times for buyers to save because as surely as price elevation will be the result of an active spring market, demand will level off a the end of 2018 as buyers and sellers focus on holidays and leave town, putting temporary downward pressure on prices. A determined buyer shopping between the 15th of November and January 15th is likely to face less competition and increased negotiation power. That’s a great reason to purchase a home in DC now. And the earlier you start, the more likely it is that you’ll avoid the final interest rate hikes of 2018.

If you’re considering a DC home purchase, contact us today.and let’s get started.

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The Isaacs Team LLC