Low Rates or Lower Prices?
If you are a potential homebuyer right now one of the big dilemmas is whether home prices are going to decrease and if so…..by how much and when? You may also be worried about whether it is better to take advantage of todays super low interest rates or ride it out?
The answer comes down to……how much would home prices need to decrease in order to offset paying potentially higher interest rates. This is certainly not something that is easy to foresee as we are dealing with two unpredictable variables but here are some ballpark calculations.
Firstly I have done a comparison on a mortgage of $500,000 with a five year term and a 35 year amortization between todays rate of 3.45% and a possible increase of up to 4.50% which could likely be the five year rate within a year or so.
The interest you would pay over 5 years at 3.45% would be approximately $82,335 and at 4.50% would be $107,952. This is a difference of $25,617 in the first 5 years and your payment would be $308 more per month.
The second factor to consider here is your purchasing power. If you currently qualify for a mortgage of $500,000 at the rate of 3.45% and rates go up to 4.50% then your maximum new mortgage could only be for about $435,000 which means the price of the home you qualify for would be reduced by $65,000. Most importantly though, you would need to rely on an equivalent (or better) percentage drop in the purchase price of the home to offset the interest rate increases. Also……what are you presently paying in rent? This amount should be factored in as well.
A sure thing right now is that mortgage rates are close to an all time low. The unknown factor is where house prices are headed.
To help you decide what strategy is right for you, I would be happy to do the calculations using your specific financial information.