How to make the numbers work.
This is the rationale numbers-wise on why people should buy now and take a long-range look based on rates and equity.
So let me just warn you, I’ve just done this with pen and paper. It’s not on a spreadsheet, but here’s what I’m figuring out. Last February, if you looked at a typical California property, let’s call it a million dollars, whatever it is, and you were putting 20% down, so there’d be a million price, $800,000 mortgage. You’re going to pay, and I’m using three and a quarter percent on the $800,000. So now you’re at $3,481 for the monthly payment. And again, this is rough, rough, rough numbers. So soon now you find a same exact house that didn’t … let’s say, right next door that you can get for $900,000. You’re putting 20% down, which is you’re now at $750 and I’m using the interest rate of six and a half percent. So now your payment is $4,550. So it’s $1,065 per month difference in the monthly payment. The equity, we’ll look at that case separately and you’ll see how it all melts in.
So I’m assuming for three years you’re going to have this interest rate or the ugly rate, but after three years you’re going to refinance it down to five and a half percent. There’s going to be a time. That’s pretty logical assumption, and there’s some other ways of looking at this, but I’m just giving you the rough numbers on this. That brings your payment down to 4088, which is $607 a month difference from that original $3,481. Then I’m assuming another 36 months, you’re going to be able to go down to a 4% interest rate. There, the payment is $3,437. So you basically … or even a little bit better than you were had you bought the house at a million dollars. So what I’m trying to show is that the pain is temporary. Now, the extra interest you’re going to pay, I calculated to roughly, let’s call it $50,000. So add that back to the $900,000. So you’ve paid $950 for all intents and purposes for the place. But let’s look at the long term. First of all, California real estate only goes up eventually.
This will go back up. Everybody sees when things go down, they want to hit the bottom, but it’s not about hitting the bottom. It’s getting a value for something you want and that you’re going to own long term. So the numbers are temporary pains, there’s no doubt about it. The other thing I didn’t do, because I just did a 30 year fix, is taking a five year adjustable. Five year adjustable, you can probably get about, let’s say five and three quarters now roughly. Big difference between that and six and a half. So you can have that for five years. You can gain more equity. I can run these numbers later, but I just like coming up with this stuff on paper and thought I’d throw it out there. So the bottom line is, if you’re able to take the pain now and you find the house you really like, it’s probably not a bad idea to make the move. There’s less buyers out there. There’s also sellers that need to sell or who just … they’re ready. Anyway, let’s look at the numbers. It’s always about the numbers.