Interest Rates vs. Purchase Price…When Should you Buy or Sell?

You’ve seen the advertisements, news reports, posts on social media and maybe you have even said these words, “The feds are planning to increase rates, so you better buy a home now.”
buy-now-or-6But, what does that REALLY mean and how does that affect your home purchase power?

Let’s say you started the home search process when interest rates were 7%. You saw a one-bedroom condo for sale for $100,000. You calculated your 30-year monthly mortgage payment on $80,000 – the amount you are mortgaging after a 20% down payment and your closing costs. Your monthly payment would be $532.  You decide you don’t like this payment and rate, so you wait six months and the interest rate drops to 5%. However, a condo in the neighborhood you want now averages $120,000. You put down 20% plus closing costs and you are left with a mortgage amount of $96,000. Your monthly payment on a 30-year mortgage is $515. Your payment dropped by $17.

But does a payment drop financially make up for the higher down payment? Factoring in that your down payment was $4,000 more, you still save about $5 to $6 per month – around $2,100 of savings over the course of 30 years. (1)

 Here’s the bottom line! For every .5% (one-half)  percent increase in interest rate your purchasing power may be decreased by 4 to 5 percent (the percentage is smaller for lower loan amounts).

For every 1 percent interest rate increase, your purchasing power may be decreased by 9 to 11 percent (the percentage is smaller for lower loan amounts).

(1) Read more: House Price Vs. Interest Rate: Which Is More Important? | Investopedia http://www.investopedia.com/articles/mortgages-real-estate/10/house-price-vs-interest-rate.asp#ixzz4K3U68tP4

Leave a Reply

Your email address will not be published. Required fields are marked *