Postponing a Purchase

You might be surprised how many people contact real estate offices because they want to buy a home but they don’t have the down payment or the credit to qualify. Occasionally, an agent will be working with someone who does have the down payment and credit but for whatever reason, decides to postpone the decision to purchase now for some point in the future.

It’s not uncommon that once they’re out of the market, the money starts burning a hole in their pocket and they end up buying a boat or a motorcycle or some other thing that cannot positively affect their lives and security the way a home does.

If the money had been put away somewhere safe like a certificate of deposit, it wouldn’t earn a lot but it would be there when they decided the time was right to buy a home. $8,750 would grow to $9,286 in three years in a 2% CD.

For the person who could tolerate a little more risk, they might consider investing in the stock market. If you found a mutual fund that would earn 7%, at the end of the same three year time frame, the $8,750 would have grown to $10,719.

Alternatively, if the would-be buyers used the same amount to purchase a $250,000 home that appreciated at only a modest one percent, the equity in the home at the end of the same three year period would be $29,597.

The dynamics of earning appreciation on the value of the home rather than just the down payment combined with the amortization of the mortgage makes the equity in the home almost three times greater than the mutual fund. If you used a 2% appreciation, the equity would be over $37,000 in the same period.

Obviously, there are legitimate reasons for postponing the purchase of a home. An important thing to remember is to safeguard the hard-earned down payment so it is ready when you are to buy in the future.

It's a Big Difference

Let’s say that you just won $8,750 on a lottery scratch-off ticket. You’ve decided to be frugal and invest the money and have decided on three alternatives: buying a certificate of deposit, a mutual fund or use the money as a down payment for a $250,000 home.

To compare the three alternatives, let’s look at the equity in each one three years from now.

The certificate of deposit can be invested at 1.3% in today’s market and you believe you can reasonably earn 5% on a mutual fund. You expect the home to appreciate at three percent a year.

The certificate of deposit would be worth $9,096 at the end of three years and the mutual fund would be worth $10,129. However, the equity in the home at the end of three years would be $45,204. That is a four time’s higher yield on the home.

One of the main reasons for the big difference is that the buyer benefits from leverage: the use of borrowed funds to increase the results. The $8,750 down payment is controlling a $250,000 investment. The appreciation is determined by the price and not merely by the cash invested. Another factor is that the loan balance is smaller at the end of five years than originally borrowed due to amortization.

There are certainly other factors to consider such as maintenance and other expenses but when the financial benefits are as strong as they are, it certainly deserves a much closer investigation. One of the first things to consider is whether the borrower can qualify for a mortgage and the only satisfactory way to be certain is to get pre-approved by a trusted mortgage professional.
Use the Your Best Investment calculator to make your own projections.