Still waiting for those mortgage rates to drop before you buy your first home?

Over the past year and a half, I have heard many people say “I want to buy a home but I’m waiting until the mortgage rates drop first”. However, this strategy might not be as financially savvy as it seems. Let’s explore why.

The Cost of Waiting

While it’s true that mortgage rates are a factor in the cost of buying a home, they are not the only consideration. As you wait for rates to fall, you continue to pay rent, contributing to someone else’s equity rather than building your own. You also allow more time for home prices to increase and opportunities for your landlord to increase your rent.

Let’s Talk Numbers

Imagine you buy a house for $350,000 with a 10% down payment. That’s $35,000 of equity right off the bat. As you pay your mortgage, you’re paying down the loan and increasing your equity. Plus, if your home’s value goes up, so does your equity. Over this last year in Washington, we saw an appreciation rate of 8.3%! Many factors drive appreciation rates, and one of the biggest factors is dropping mortgage rates. However, to keep my completely hypothetical scenarios conservative, I’m going to use a national average appreciation rate of 6.5%. For this hypothetical $350,000 home, that could be an increase of $22,750 per year which is simply automatic equity for you, largely driven by favorable mortgage rate changes.

The Math Behind Buying a Home

Here’s a breakdown of what it looks like to buy a $350,000 house with a 10% down payment, assuming a 6.5% home appreciation rate and a 6.8% mortgage rate:

• Down Payment: $35,000 (10% of $350,000)

• Mortgage Amount: $315,000

• Monthly Mortgage Payment: About $2,050, not including insurance and taxes

• Principal vs. Interest: In the first year, you might pay about $21,270 in interest and $3,334 towards your principal

• Equity Gained in One Year: Now take that $35,000 down + $3,334 paid to your principal loan + your home’s appreciation of $22,750 = $61,084 in equity that is YOUR money/asset! After only one year you have essentially doubled your down payment. 

• By the end of 2026: The percentage of your payment going to your principal loan balance would increase a little to something closer to $3,600 while your percentage toward interest would have reduced to closer to $21,000 over the second year. Add on another $22,750 for that sweet, sweet appreciation, and you are looking at having almost $87,500 in equity in only 2 years!

What If You Wait?

Say you decide to wait and rent for another year at $2,050 per month, hoping mortgage rates will drop. You’d pay $24,600 in rent that year, with no equity to show for it.

Now let’s say it’s 2025, and mortgage rates have dropped to 6.25%. Well that same house you wanted before has increased to $375,000 due to appreciation but for the sake of clear comparison, let’s say you find a different house that’s offered at $350,000. 

• Monthly Mortgage Payment: Now it’s about $1,940 per month

• Principal vs. Interest: Over the first year, you might pay around $19,590 in interest and $3,689 towards your principal

• Equity Gained by the End of 2026: so here we are again, take your $35,000 down + your $3,689 principal paid + $22,750 appreciation = $61,439 in equity.

The real cost

If you isolate just the first year of home ownership, yeah, that lower mortgage rate technically made you $1,675 more in one year from your lowered payment + more of your payment going towards your principal. However, when you take into account the $22,750 of appreciation you missed out on by waiting a year and that extra year’s $3,600 you could have paid into your principal all with the same monthly payment, waiting for the interest rates to drop actually cost you about $26,350 in additional equity you could have had by the end of 2026

Lower Down Payment Options

Don’t have $35,000 for a down payment? No problem! Don’t let that be the reason you miss out on building wealth sooner than later. There are programs out there that can help you get into a home for much less. Some programs offer down payments as low as 5% or even 3%. On a $350,000 home even with as little as 3% down you could still be looking at gaining something like $50,000 of equity by the end of your first two years of home-ownership. 

Here’s what you need to know:

Government-Backed Loans

• FHA Loans: These loans are insured by the Federal Housing Administration and allow down payments as low as 3.5%.

• VA Loans: If you’re a qualified veteran or service member, you could be eligible for a VA loan, which doesn’t require any down payment.

• USDA Loans: For rural and some suburban homebuyers, USDA loans can offer 0% down financing.

Conventional Loans with Low Down Payments

• Fannie Mae and Freddie Mac: These government-sponsored enterprises back loans that may require as little as 3% down.

Down Payment Assistance Programs

Many state and local governments offer down payment assistance (DPA) programs in the form of grants or loans to help cover part of the upfront costs. These programs are often geared toward first-time homebuyers or low- to moderate-income borrowers.

Bottom Line

Waiting for mortgage rates to drop might save you a bit on interest, but it could cost you big in terms of equity. Buying a home sooner can help you start building wealth right away. Just remember, every housing market is different, so talk to a financial advisor or contact me directly when you are ready to make a move.