Here is Why You May Want to Reconsider
Lower rates make more expensive homes available at a lower monthly payment!
They always say the best time to buy was last year and the Next Best time to buy is NOW!!! This could not be truer. Buy now and quit waiting for prices to maybe, hopefully, crossing fingers to go down. Here is why!
With lower interest rates, you can qualify for a much higher home, that you would not qualify for when home prices go down! And, in two years, you can use the equity and appreciation of the home to purchase another home. The home of your dreams!
Remember when home prices go down rates will Always go up to compensate the lender. Lenders make it more difficult to buy a home and the need for better credit is necessary and affordability decreases. Rising interest rates make buying or selling a home more difficult and decreasing interest rates make buying and selling easier.
Say you are comparing a home in San Diego that was worth $900,000 and your interest rate is 3%. If you were buying in a declining market and waited until that price fell to $800,000 but rates went up to 5%, you would be better off buying at a higher price.
Now, let’s look at more realistic short-term changes. The amortization of most mortgages is for 30 years, and rates tend to fluctuate by a quarter or half of a percent. Here’s an example of how much home you could afford with rate fluctuations of 0.5%. and a down payment of 20% of the sales price, assuming you want to keep your payment (principal and interest) around $3000.
See how they compare:
Payment on an 80% LTV mortgage for a $900,000 home at 3% is $3,035.55.
Payment on an 80% LTV mortgage for a $800,000 home at 5% is $3,435.66.
There is a Loss in Sales Price with Each .5% Interest Rate Hike
$900,000 X 80% at 3% interest equals a payment of $3,035.55
$860,000 X 80% at 3.5% interest equals a payment of $3,089.43
$820,000 X 80% at 4% interest equals a payment of $3,131.84
$775,000 X 80% at 4.5% interest equals a payment of $3,141.45
$740,000 X 80% at 5% interest equals a payment of $3,177.98
Note: A 5% increase in price of the house has little impact on affordability if the interest rate is low. That is because the extra cost is spread over the many years of the mortgage, but the numbers will vary depending on the size of the home price or interest rate increase. You must consider how both will affect your monthly payment.
Yet, a 2% increase in an interest rate could lose you over $100,000 of purchasing power in this price range. If you doubled the sales prices in this example, you would lose approximately $200,000 of purchasing power with a 2% spread in interest.
All quotes are based upon 3% and 3.5% interest and not considering credit or down payment. Please speak to a professional mortgage broker to get more accurate info based upon your personal finances….
Prices WILL Go back up.. every 2- 5 years, they always do. So, in the end, isn’t it better to get a $900k home at the same monthly mortgage payment as a $740K home, especially when it comes to sell it when those prices do go back up!
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