is it time For you to Buy
The eternal question many of my clients ask is, “When is the right time to buy a home?” This decision is never easy, especially when we consider the fluctuating interest rates and house prices on the Big Island. Let’s break down the current landscape using recent information and dive into what this means for potential homeowners.
The Current Mortgage Landscape
Recent articles by reputable sources have shed light on the current state of mortgage interest rates. According to an article by Katherine Watt on Cnet.com, there have been some fluctuations in the mortgage interest rates in the past week. The 30-year fixed-mortgage rate average is now 7.83%, showing a slight dip[^1^]. Meanwhile, the 15-year fixed mortgage rate stands steady at 7.04%[^1^]. The dynamic nature of these rates, influenced by actions of the Federal Reserve and broader economic indicators, make them essential to consider when contemplating a home purchase.
It’s worth noting that after 11 rate hikes since March 2022, the Federal Reserve recently opted not to increase it further[^1^]. They’re closely monitoring inflation, which remains above the target, and may raise rates again if inflation doesn’t continue to moderate[^1^].
Local Perspective: Big Island’s Housing Market
Diving into the specifics of our beloved Big Island, the real estate landscape looks quite busy. The sales volume is impressive, clocking in at a whopping $2,607,341,214, with a median price of $331,125. But there’s more to consider than just these numbers. The average days on the market is 73, indicating that properties are selling relatively quickly.
Given our current low inventory of active listings at 1,794 and a high number of properties under contract at 762, it suggests a seller’s market. Plus, the final list price to the sold price stands at 92.86%, indicating that most homes are selling close to their listing prices.
While property values are predicted to appreciate at 5.8% per year, potential homeowners should consider that alongside rising interest rates. If we blend this with the insights from Cnet.com and Newsweek, where the U.S. Federal Reserve is carefully navigating the interest rate to counteract inflation and stimulate a “soft landing” for the economy, the overarching message is one of caution and strategy.
Making the Right Decision
Deciding when to buy is a nuanced dance between the local real estate market, national interest rate trends, and individual financial situations. Katherine Watt’s piece on Cnet.com provides a valuable takeaway: focus on what you can control[^1^]. Improve your credit score, save for a more substantial down payment, and compare the total costs of borrowing from multiple lenders[^1^].
Another key factor? The loan term. While the 30-year fixed-rate mortgages are popular for their lower monthly payments, 15-year options can result in less interest over time[^1^]. For those staying short-term, adjustable-rate mortgages may present an appealing upfront rate but be wary of the eventual rate adjustments[^1^].
What it could look like
To better illustrate the complexities of the decision-making process for potential homeowners, let’s explore three hypothetical scenarios: buying a home now, in 1 year, and in 2 years. These situations will factor in the appreciation rate for homes and the current predictions about interest rates.
1. Buying Now
- House Price: $800,000
- Mortgage Rate: 7.83% (30-year fixed rate as of October 11, 2023)[^1^]
- Down Payment (20%): $160,000
- Loan Amount: $640,000
Over 30 years at the current rate, monthly payments would be approximately $4,493. For the first year, a large portion of this payment would go towards interest.
2. Buying in 1 Year
Assuming a 5.8% appreciation rate[^2^]:
- House Price: $846,400
- Projected Mortgage Rate: Let’s predict a slight dip to 7.5% based on the Federal Reserve’s cautious approach[^3^].
- Down Payment (20%): $169,280
- Loan Amount: $677,120
While the house price has gone up, the slight dip in mortgage rates means monthly payments would be approximately $4,725. While it’s higher than the current scenario, remember that other external factors, like a changed personal financial situation or market demand, might impact this decision.
3. Buying in 2 Years
Assuming a consistent 5.8% appreciation rate[^2^]:
- House Price after 1 year: $846,400
- House Price after 2 years: $895,475
- Projected Mortgage Rate: Assuming stability based on the Federal Reserve’s projections[^3^] but accounting for minor fluctuations, let’s say the rate stands at 7.2%.
- Down Payment (20%): $179,095
- Loan Amount: $716,380
With this rate, monthly payments would be approximately $4,862. The house price has gone up significantly over the two years, and while the interest rate is slightly lower than our current rate, the monthly payment has risen considerably due to the appreciated house price.
Buying Now and Refinancing Later: A Strategic Approach
Buying Now and Refinancing Later: A Strategic Approach
One strategy many potential homeowners might not consider, especially in a climate of rising interest rates, is the option to buy a home now and then refinance the mortgage later when rates drop. It’s a method that can offer both immediate and long-term benefits. Let’s break this down for a clearer understanding.
1. The Immediate Benefit of Buying Now
Secure a Home in a Competitive Market: In a market like the Big Island, where property values are appreciating at a rate of 5.8%[^2^] and inventory is low, waiting might mean paying significantly more for the same property in the future. Buying now secures your desired home without the risk of it becoming unaffordable or unavailable later.
2. Refinancing: The Long-Term Strategy
What is Refinancing? Refinancing involves replacing your current mortgage with a new one, ideally with better terms, often a lower interest rate. This can result in lower monthly payments, and over the lifespan of the loan, substantial savings in interest.
Why Refinance? Given the current trajectory of interest rates and the Federal Reserve’s cautious approach[^3^], there’s potential for rates to stabilize or even dip in the future. If this happens, homeowners who purchased at a higher rate could refinance to capitalize on the lower rates.
Benefits of Refinancing:
- Lower Monthly Payments: If interest rates drop even by a fraction of a percentage, it can translate to significant monthly savings.
- Shorten Loan Term: With a reduced interest rate, you might be able to pay off the loan faster by choosing a shorter loan term while maintaining a similar monthly payment.
- Cash Out Equity: If the home appreciates in value, you might have the option to refinance for more than what you owe, allowing you to cash out the difference.
Considerations Before Refinancing:
While refinancing can offer substantial benefits, it’s not always the best choice for everyone. Here are some factors to consider:
- Closing Costs: Refinancing usually comes with closing costs, similar to your original mortgage. You’ll need to ensure the savings from a lower rate outweigh these costs.
- Loan Term Reset: Refinancing restarts the clock on your mortgage. If you’re 5 years into a 30-year mortgage and refinance to another 30-year loan, you’re now looking at 35 total years of payments. However, this can be mitigated by opting for a shorter loan term during refinancing if feasible.
- Personal Financial Situation: Your credit score, debt-to-income ratio, and other personal financial factors will play a role in the kind of terms you can secure when refinancing.
Benefits and Pitfalls of Buying with Cash and Large Down Payments in the Current Market
In a competitive housing market like the Big Island’s, the allure of buying with cash, putting down a hefty down payment, and considering options such as PMMs (Purchase Money Mortgages) with sellers, is particularly strong. Let’s dive deeper into these strategies, discussing their advantages, pitfalls, and notably, the role and benefits of PMMs.
1. Buying with Cash or Large Down Payments
Benefits:
- Attractiveness to Sellers: In a seller’s market, a cash offer can be a distinguishing factor. Sellers often lean towards cash buyers due to fewer potential financing hiccups.
- Faster Closing Process: The absence of mortgage approval can significantly expedite the buying process.
- No Interest: Eschewing a mortgage translates to substantial savings on interest payments.
- Immediate Equity: A home acquired with cash or a sizeable down payment establishes instant equity in the property.
Pitfalls:
- Liquidity: Investing a large sum in a property can affect your liquidity, potentially limiting other investment prospects or immediate financial necessities.
- Opportunity Cost: The funds used to buy a home outright could potentially fetch higher returns if invested elsewhere, especially in appreciating markets.
- No Mortgage Interest Deduction: Some homeowners benefit from tax deductions on mortgage interest, an advantage relinquished when purchasing with cash.
2. Purchase Money Mortgages (PMMs)
What is a PMM? A PMM is a loan provided by the property seller instead of a conventional lender. When a buyer is unable to secure a traditional mortgage or when it’s strategically advantageous, the seller might extend financing terms directly to the buyer.
Benefits in the Current Market:
- Flexible Terms: PMM terms are negotiated between the buyer and seller, allowing potential flexibility in interest rates, repayment schedules, and more.
- Accessibility: For buyers who might not meet traditional mortgage qualifications due to strict bank criteria, a PMM can emerge as a beneficial alternative.
- Speed: PMMs can lead to faster closing times as opposed to traditional mortgages.
- Negotiating Power: In a high-value property market, presenting a substantial down payment combined with a PMM might appeal more to sellers, as it vouches for the buyer’s commitment.
Pitfalls:
- Higher Interest Rates: Some sellers might set higher interest rates than traditional financial institutions.
- Shorter Loan Terms: PMMs often have shorter loan durations, resulting in larger monthly installments or balloon payments later on.
- Potential Scams: It’s vital to ensure that all PMM agreements are meticulously documented. Engaging a real estate attorney can help safeguard against potential deception.
Embracing the Future with Optimism and Aloha!
The winds of change and the rhythm of the waves teach us one undeniable truth – life on the Big Island is as unpredictable as it is beautiful. Just as the fiery lava cools to form new land, the ebb and flow of our housing market and economy are shaping our future. While the numbers, rates, and statistics might seem daunting, remember that behind every decision lies an opportunity, behind every challenge awaits an adventure.
The journey to homeownership isn’t just about securing a property; it’s about anchoring our dreams, fostering communities, and building legacies. And while the path may be filled with uncertainties, it’s our collective spirit of ‘Aloha’ that will guide us through. It encourages us to embrace one another, to learn, share, and grow together.
As the sun sets on today and promises a radiant dawn tomorrow, let’s march forward with hope in our hearts and dreams as vast as the Pacific. Because here on the Big Island, we’re not just buying homes; we’re crafting stories, nurturing bonds, and celebrating life in all its vibrant hues.
So, whether you’re on the brink of a major life decision or simply contemplating the future, remember: every wave starts as a ripple. Dream big, stay informed, and let your heart be your compass. Mahalo for joining us on this journey, and here’s to riding the waves of tomorrow with joy, courage, and unwavering aloha spirit!
[^1^]: Cnet.com – Current Mortgage Interest Rates on Oct. 11, 2023 by Katherine Watt [^2^]: [Big Island Sales Stats, 2023] [^3^]: Newsweek – Federal Reserve’s Rate and Economic Projections, 2023
About the Author
James T. morrison, R(S)
James is local realtor who has lived on Big Isand his entire life. He is proud to be Realtor and works his hardest to please his clients.
He is a proud memeber of the Papakea Collection along side his partner, Julie Armstrong.
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