I have been speaking with a homeowner in The Glen (in Glenview, Illinois) who is interested in buying a larger home. He currently owns a beautiful home in the Chapel Crossing neighborhood with a market value of $800,000. He is interested in purchasing a home in Southgate, and he is willing to pay $1 million.
My client, let’s call him Bob, is concerned about the return he will receive on his current home which he paid $875,000 for a few years back. He wants the larger Southgate home, but he doesn’t want to take the loss on his current home.
Together we looked at the current and projected increases in Glen home prices and interest rates. He felt comfortable projecting an increase in Glen home prices of 12% in three years. Interest rates are low, but they are moving up. In fact, they have increased more than a point in the last 6 weeks. Based on projections of a number of experts, Bob decided to project an increase in mortgage interest rates of 2.1% in three years. So we did the math, and here are the results.
- While Bob would lose $75,000 on his current home, his $1 million Southgate purchase would be $120,000 higher in three years.
- If Bob bought the new home now, he would put $200,000 down (assuming 20%) vs. $224,000 in three years due to its appreciated value.
- In three years Bob would be financing $896,000 rather than $800,000 today.
- His mortgage would be $1,600 more each month if he waits three years.
The lesson is this: If you are buying a more expensive home in a period of rising prices and rising interest rates, it’s often best to not wait; take the loss on your current home now. You will likely make up the loss on your next purchase, and you will end up paying less overall. I will point out, though, that no one can be certain what will happen in the future. So, be conservative in your projections and consider all options.
Margaret Ludemann, resident of The Glen, Coldwell Banker Realtor, 847-401-1802