Should I Stay Or Should I Go?

Should I stay or should I go? That popular song written by The Clash in 1981 now poses a common question for homeowners. There are thousands of homeowners around Metro Atlanta considering their options. Should I stay in my current home and wait until values improve or should I go ahead and make a move? The answer to that question depends upon a number of variables for your specific situation. But there may be some big surprises in store for some who wait. The following is a brief discussion of some factors to consider.

First, you want to do the math on the value or your current property and the outstanding mortgage. If you are significantly upside down on your equity, you may have to bring money to the closing table. If that is not feasible, you may need to wait until the market values improve. Another option is to rent your current property, go ahead and purchase the desired property and then sell your rented property when values return. There may also be an option for a short sale if you have a financial hardship. We would be happy to help you assess your options.

If you do have sufficient equity, then your options change. Still, the most common thinking for people in this category is to wait until values return to higher levels and then sell. But one must consider the other side of the math equation. What will it cost you to buy your next home in the future? If home prices return back to peak levels, the cost of the next home will also rise. But that is only part of the math. Now, let’s consider changing mortgage rates plus the ongoing costs for maintenance and energy on your current home.

Energy costs continue to rise and most analysts expect them to be higher in the future. On average, a newer home has 30% less energy expense than homes built in previous decades. Maintenance and repair costs are also lower. Tired of paying to mow the grass and rake the leaves? Are your HVAC systems in need of replacement? What about your roof and windows? How about your appliances? It seems like these expenses never end! You can estimate your current expenses and compare them to the expenses of a newer property. Over time, these numbers add up to real money.

But the biggest factor to consider is mortgage rates. If you need a mortgage to finance your next purchase, consider this. Mortgage rates are currently at all-time lows. We have never seen rates this low and will not likely see them again in our lifetimes. The average mortgage rate in the last 50 years was 8%. Right now, the Fed is spending $40 billion per month to buy mortgage securities to artificially keep rates down. That cannot last forever as we face looming deficit challenges. The whole mortgage system is broken and will need to be reformed to restore a functional system. There are several major pieces of legislation pending that can accomplish this task. In every scenario, the result will be higher rates, additional fees and tighter credit standards. For more details on these pending issues, see our blog post on ATLscoop.com. So how fast and how high will mortgage rates rise? The Mortgage Bankers Association and Freddie Mac both predict rates to rise to over 4% next year. In 3-5 years, we expect to see rates return to the 6-8% range. These things always move in cycles. Remember the early 1980s? Rates were in the high teens after a period of heavy Fed spending that fueled inflation. Sound familiar?

Let’s look at some math so we can see the facts. Current 30-year mortgage rates are approximately 3.25%. For those who have been around a while, that is an unbelievable rate. If you decide to purchase a new home today, you can set these historically low rates going forward. If you wait and rates go up, it could cost you significantly. See the examples below. Let’s say you have a loan for the new property of $200,000. That is very close to the average in Metro Atlanta. If you wait 3-5 years for home values to improve, rates are going to be higher. The only question is – how high? If rates go up to 5%, your monthly payment for principle & interest will be $1,072 instead of $870. Over the course of a 30-year mortgage, that amounts to $72,720! If rates go up to the historical average of 8%, it would cost you $141,840 more! That also translates to a 68% loss in buying power.

Example: If you could afford a monthly mortgage payment of $870 for a $200,000 loan – now you would only be able to get a $136,000 loan for the same monthly payment. Yikes! These numbers are even higher for the luxury market.

There are thousands of baby boomers across Metro Atlanta who have figured out this math and are on the move. That is why baby boomers have outpaced first time home buyers as the most active segment. Many want to simplify and are buying a newer home that offers less maintenance and more efficient usage of energy. They realized that they would spend a significant amount of money on gas, electric, water, plus repairs and maintenance on their current property. They also realize they can take advantage of lower prices and incredible financing - right now.

For others, they struggle to see past the loss of value on their current home. Psychologists have studied this pattern over the years for different kinds of investment choices like stocks and real estate. They found that the “fear of loss” is 2.5 times more powerful than the pleasure associated with the opportunity for gain. Most people miss the opportunity for gain because they cannot see past the fear of the initial loss.

If you or someone you know would like to better understand the options, we can help. Please share this message as we fear many people will be shocked if they wait too long.