Should You Buy a Home Now or Wait?
Q. We’ve been working to improve our credit so we can buy a home. My wife thinks we should buy now, even though we will have to pay a higher interest rate. She said we can always refinance later. I think we should wait. How do we know which is the right move?
A. Asking this question is good step in the right direction. Buying a house is an emotional experience. And even after you sign on the dotted line, there’s all kind of sentiment tied to your home. In this case, it’s best to take emotion out of the equation and focus on facts instead.
For purposes of illustration, let’s say you want purchase a $200,000 house and that your credit score is 761. With this score, you could qualify for a rate of 3.7%, which would make your principle and interest payment $920.57 a month. By comparison, if your score is 637 then your rate will be higher, at 5.4%, making your principle and interest payment $1,123.06 a month.
Over the course of a year, you’d pay an extra $2,429.88 a year in interest if you had the lower credit score. Over the life of a 30-year loan, this means you would pay $72,896 more in interest if you paid 5.4%, instead of the 3.7%. Saving $2,429 a year is like getting a dollar an hour raise in pay. Imagine over 30 years what you could with an extra $72,000.
While you might have the option of refinancing down the road, this costs extra money, too. Fees may vary, but you could spend anywhere from $3000 to $6000 to refinance your home.
What’s more, the future isn’t certain. To count on refinancing, you are assuming that your credit will improve and that your financial situation will be the same or better a few years from now. What if you are not able to refinance? What if one of you loses a job? What if your debt load increases because you bought new appliances on credit?
What if you wait a year and finish improving your credit before you buy? You will save money over the life of the loan, since you will qualify for a better interest rate. If you qualify for a better rate, you may be able to buy more home with your money. Plus, you will not have to spend more money later to refinance.
Many times we want something, and we want it now. Whether you are signing 5, 10, or 30 year loan, a little patience can go a long way.
Bonnie Spain is the executive director of the American Center for Credit Education and Consumer Credit Counseling Service of the Black Hills. For more information, email firstname.lastname@example.org.
The material in this transmission is provided for personal, non-commercial, educational, and informational purposes only. ACCE makes no representations or warranties with respect to the accuracy or completeness of the contents of this transmission and assumes no responsibility for errors, inaccuracies, omissions, or any inconsistency herein. You should consult a professional where appropriate.