Nick Pakulla - Mortgage Lender Loan Officer in MD, DC, VA

Now is truly a good time to buy a home even if you may be underwater! 

I have been running across a lot of potential sellers who don't want to sell their current home because it is not at the value they want it to be and some even have to pay some money to get out.  Well, I am questioning whether it make sense to "wait until property values come back up" and below I present some numbers as to why it may actually make sense to take the loss on your current property to take advantage of the lower priced next home and current great mortgage rates. 

Base Information:

• Townhome purchased in 2007 for $300,000
• After closing costs and seller concessions net on sale now would be $260,000
• Looking for a single family home in the $600,000 range  

The seller's logic is that if they sell now they have effectively "lost" $40,000. And has now decided to wait until home values get back up before moving 

Possible Outcomes: Economy worsens, mortgage rates may get even better, but home prices take more of a drop Economy stays the same, seller is left in the same scenario Economy continues on recovery pace slowly getting better, home prices slowly rise, mortgage rates slowly rise

My assumption is that the economy will continue on its current slow pace to recovery, thus increasing home prices, and mortgage rates will slowly rise, aka #3. 

So let's examine if the economy continues on its current slow path to recovery:

Spring 2012: Great news Mr. Seller!  Your townhouse will now net you $299,000!

• Since home prices are now up 15%, your $600,000 home will now cost $690,000.  Gain of $39,000 equity in your current home! Loss of $90,000 in unrealized equity on the new home.  Net equity loss $51,000!
• Since the economy has recovered, investor's have favored riskier options and current record low mortgage interest rates are no longer around.  Let's assume the current fall 2010 jumbo-conforming rate (above $417,000 in select areas) is 4.5%.  The 2012 rate is higher but still reasonable at 5.5% (we were near this in the spring of this year!).  Borrower is putting 20% down. 
• $576,000 total interest paid at 5.5% on a $552,000 over 30 years
• $455,000 total interest paid at 4.5% on a $552,000 over 30 years
• Net interest loss $121,000!

Bottom line, if you are thinking about buying in the near future and are worried about selling at a loss, maybe its worth think again to weigh all the risks / pros and cons!  

Some reading about where the housing market and interest rates are going over the next couple of years:

• There will be continued recovery with more growth in home sales in 2011 and 2012 http://www.inman.com/news/2010/10/26/mba-sees-double-digit-sales-growth-in-2012
• Record low mortgage rates are here right now and will likely not be here in 2011 and 2012 http://www.marketwatch.com/story/record-low-mortgage-rates-will-be-gone-in-2011-2010-10-26

(Note: if the borrower can qualify holding both properties and would consider renting out their townhouse that may be a way to capitalize on the rising prices plus take advantage of lower prices and rates on a new home).  Feel free to call me at 301-585-7283 if you would like me to discuss this scenario for your specific situation.