Why Mortgage Rates Love the Fencesitters…
August 12th, 2008 categories: Buying San Francisco, Real Estate News
If you are in the market to purchase a home, and you are waiting for the market to hit rock bottom, then keep reading.
Two questions should linger in your mind:
How much more will the housing prices fall?
What will happen to the interest rates?
Let’s assume that prices will drop for another 6-12 months. If you are planning on purchasing with all cash, you can afford to wait. But what if you must finance your purchase? The following are hypothetical numbers.
Scenario 1:
- $50,000 down payment
- $500,000 purchase price
- 6.25% interest rate
- Monthly Payments = $2770,73 per month
So, you wait for the prices to drop. Check this out:
Scenario 2: Same property 6 months from now
- $465,000 purchase price
- $50,000 down payment
- 7.25% interest rate
- Monthly Payments = $2901.74 per month
The monthly mortgage, after waiting for prices to fall, is now $130/month more than if you had bought when the rates were lower. As you can see, if interest rates rise enough, you could end up paying more even if a property’s price goes down.
The Power of Interest
Let me ask you this. What if you keep the loan for the full 30 years at 6.25%, and you bought the property for $500,000 like in scenario one? You will end up paying $997,461.86 over the full 30 years. If you wait until the $465,000 and pay 7.25% in interest, the full loan after 30 years of payments comes to $1,019,171.36. That is power of interest.
Save Money, Buy Now
As long as you plan on living in the property for a minimum of 5 to 7 years with an affordable fixed rate loan, buy sooner rather than later. If you are thinking of purchasing a property in the near future, a good question to ask is, “Will interest rates go up, down, or remain the same?”
The graph below shows the average mortgage rate according to Freddie Mac since 1971. I’ll let you be the judge of whether or not interest rates will eventually go up…
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[…] the interest rates haven’t changed much. Are you waiting for the market to hit rock bottom? What happens if the interest rates go up? You may end up paying more even if houses go down a bit more. The situation is relative if […]