Published 19 January 2018
LAS CRUCES – Which is the better choice: Purchasing an entry-level home now utilizing your current income, or waiting to purchase your dream home when your income is noticeably higher two years from now? That’s the dilemma a Las Cruces elementary school teacher is facing at this very moment.
Since our school teacher is a real person, I’ll simply refer to her as Ms. First-Timer. Her struggle revolves around her ability to purchase a $100,000 entry-level home now that carries a monthly payment which doesn’t stress her budget, and her desire to own the $170,000 property that she describes as her ultimate dream home. Her thinking is that her income will be high enough two years from now to qualify for the higher-priced home without squeezing her finances. Let’s see if that’s true.
Ms. First-Timer currently makes $32,000 per year, or around $2,700 per month. Her down payment on a $100,000 purchase today utilizing an FHA loan at 4.0 percent would be around $3,500 and her monthly payment would be around $670 (including taxes and insurance). In this scenario, her monthly payment would consume just under 25 percent of her gross income.
Ms. First-Timer projects that her income will rise to $36,000, or $3,000 per month, two years from now. At the same time, home values and mortgage interest rates are also projected to increase. The question is by how much?
If you read last week’s column, you already know that the average value of a Las Cruces-area home rose by 8.1 percent last year. For this exercise, however, let’s say that local home values increase by just 4.0 percent per year over the next two years. That would increase the value of our $170,000 home by $6,800 by the end of this year and by an additional $7,072 by the end of 2018, making today’s $170,000 home worth an additional $13,872 by 2020.
That means our school teacher’s $170,000 dream home will cost her $183,872 when she’s ready to make her purchase. In addition, the Mortgage Bankers Association projects that mortgage interest rates will rise to 5.3 percent by the time she’s ready to sign on the dotted line. The increase in value, coupled with the rise in mortgage interest rates and higher taxes and insurance, will increase her down payment to $6,435 and her monthly payment to $1,302.
In the end, waiting two years to purchase will cause Ms. First-Timer’s down payment to increase by an additional $2,935 and her monthly payment to rise by $632. It also means that she will be utilizing just over 43 percent of her projected $3,000 per month gross income towards her house payment.
While the utilization of 43 percent of her gross income will probably not disqualify our teacher from obtaining a loan, it certainly reduces the amount of disposable income that could be used for quality-of-life activities such as vacations, vehicle replacement, and any other unexpected obligations that may arise.
While opinions may differ, mine is that she would be better off purchasing an entry-level home now to take advantage of today’s low mortgage rates and tomorrow’s increase in value. Buying now also provides income tax deductions that are not available to renters, and the possibility of either keeping her present home as a rental or selling her current home and using her equity towards the purchase of that dream home she’d ultimately like to own.
To determine if purchasing now or waiting to buy until your income is higher, check with a local Realtor. He or she can easily provide the information you’ll need to make an informed decision.
See you at closing!
Gary Sandler is a full-time Realtor and president of Gary Sandler Inc., Realtors in Las Cruces. He can be reached at 575-642-2292 or Gary@GarySandler.com