You have been thinking for quite sometime about buying a new home. You are sitting on the couch talking with your family and you say, “the housing prices are go
ing down in 2019 so I think we should wait” and another family member says, “I heard the interest rates are going up so I thing we should buy now”. Therefore the debates begins and you have no idea of what to do. Let’s talk about it and see if we can provide some clarity.
Determining whether sales price or interest rate is more important is really dependent upon your perspective. A general rule of thumb is when interest rates goes up, home sales prices move down to balance things out, however this does not always happen in every case.
Say you are comparing a home in Phoenix that was worth $240,000 and your interest rate is 4.5 percent. If you were buying in a declining market and waited until that price fell to $210,000 but rates went up to 6.5 percent, you might be better off buying at the higher price. Yes, it is true. A payment on an 80 percent LTV mortgagefor a $240,000 home at 4.5 percent is $972.84.
A payment on an 80percent LTV mortgage for a $210,000 home at 6.5 percent is $1067.87.
Put another way, if you paid $30,000 more for the home by paying $240,000 and lived in that home for 30 years, by the time you paid off your loan, you would have paid a total of $350,222.24.
If you paid $30,000 less by paying $210,000 but paid on the higher interest rate for 30 years, by the time you paid off your loan, you would have paid a total of $384,433.20. In this instance, it is not better to pay less in exchange for a higher interest rate.
Let’s now compare that home at $240,000 if rates went up a half point, and you wanted to keep your payment the same. The amortization of most mortgages is for 30 years. If your down payment is 20 percent of the sales price, how much of the home could you buy to keep your payment around $975?
- $240,000 x 80 percent at 4.5 percent interest equals a payment of $972.84
- $226,260 X 80 percent at 5.0 percent interest equals a payment of $971.65
- $214,062 X 80 percent at 5.5 percent interest equals a payment of $972.34
- $202,500 X 80 percent at 6.0 percent interest equals a payment of $971.27
- $192,188 X 80 percent at 6.5 percent interest equals a payment of $971.80
You can see that a 2 percent increase in an interest rate would lose you about $50,000 of purchasing power in this price range. If you doubled the sales price, you would lose about 100,000 of purchasing power for a 2 percent spread in interest.
This is why interest rates play a huge factor for many first-time home buyers. If you are stretched too close to the top end of your price point and rates go up, you might not be able to buy that dream home you want because you will no longer qualify for that sales price. And, just so you know, making a lowball offer is not always the answer.
Finding the Right Answer
There’s no magic crystal ball that will pinpoint the exact perfect time to buy your next home hopefully I have shared something for you to think about and for you to talk to your lender and make the decision that will work for you and your family. When you are ready to make that new home purchase the T & M Team will be here to guide you every step of the way from selecting the home of your dreams to receiving the keys at close of escrow.
We are Leroy & Theresa Miller with The M & M Team Realty. We are Residential Realtors working with clients to purchase, sell or lease. We specialize in clients who need to sell or purchase property due to life changing events (i.e. a divorce). We understand the urgency and sensitivity of the clients needs.
We are The M & M Team Realty, “The Answer to Your Life Changing Events”