If you’re thinking about buying a home but don’t have a 20% down payment, you’ve probably been following the upcoming changes to mortgage rules. Starting December 15, 2024, buyers with less than 20% down will be able to get an insured mortgage with up to 30 years amortization, compared to the current 25-year maximum.
But with this change looming, should you hold off on getting a mortgage until then? Let’s look at the pros and cons—plus what might happen with interest rates and housing prices.
Pros of Waiting for December 15, 2024
1. Lower Monthly Payments
A longer amortization period means lower monthly payments. With 30 years instead of 25 to pay off your mortgage, your payments will be spread out, giving you some breathing room each month. This can help if you’re balancing other financial obligations. As an example, on a property priced at $500,000 with 5% down payment, you would currently be paying roughly $2731 a month on a 25 year amortization, assuming a rate of 4.49%. With a 30 year amortization your payment drops to $2492 a month, a cashflow savings of $239 a month.
2. Increased Affordability
The longer amortization might allow you to qualify for a more expensive home. With lower payments, your total debt ratio will look better when lenders calculate how much mortgage you can afford. This could make it easier to buy a larger or more desirable home.
3. Extra Flexibility
You can always pay your mortgage off faster by making extra payments or increasing your regular payments, but having the option of lower monthly payments for longer gives you flexibility. This might come in handy if your financial situation changes down the road.
Cons of Waiting
1. More Interest Paid Over Time
The tradeoff for lower payments is that a 30-year mortgage means you’ll pay more in interest over the life of the loan. If your goal is to build equity quickly and pay off your mortgage sooner, waiting for this option might not be ideal.
2. Uncertainty Around Interest Rates
We expect fixed mortgage rates to come down by late 2024. While that’s great news for buyers, there’s no guarantee that rates will be as low as you hope by the time December rolls around. Waiting might save you money on payments, but there’s always a chance that rates could shift unexpectedly in either direction due to unforeseen economic changes.
3. Housing Prices Could Increase
One big unknown is how housing prices will respond to these changes. In 2021, when mortgage rates dropped significantly, we saw a surge in home prices as buyers flooded the market to take advantage of lower borrowing costs. A similar pattern could happen in 2024, especially if many buyers delay their purchase until the longer amortization option becomes available. This increase in demand could drive prices up, potentially negating any benefits of waiting.
Rate and Price Dynamics: What Happened in 2021?
To give some context, here’s what we saw in 2021 when mortgage rates dropped to record lows:
| Year | Mortgage Rates | Home Price Change |
|---|---|---|
| 2020 | 2.5% (avg. fixed) | +10% |
| 2021 | 1.75% (avg. fixed) | +20% |
In 2021, lower rates meant more buyers could afford to enter the market or upgrade to larger homes, leading to a surge in housing demand. The result? Home prices skyrocketed by 20% in many areas. If we see a similar reduction in rates in 2024, it’s possible that prices could rise again, especially if the longer amortization period makes homes more affordable for a wider range of buyers.
So, Should You Wait?
If affordability and lower monthly payments are top of mind for you, waiting for the 30-year amortization option could make sense. It gives you more room in your budget and could increase the amount of home you qualify for.
However, if your goal is to build equity faster and minimize interest costs, the current 25-year amortization might be more beneficial. Plus, housing prices and interest rates are always wildcards. A drop in rates could push prices higher, like we saw in 2021, making it harder to find a home within your budget.
The best approach is to stay informed and consider your own financial goals. A conversation with a mortgage broker can help you weigh your options as December 2024 approaches.
If you have any questions about how these changes affect your homebuying plans, feel free to reach out!
