Timing Your Next Move? Interest Rate Is Now More Important Than Home Prices

Watching Home Prices Could Be a Costly Mistake

With interest rates at historic lows and expected to increase over the next few months, it is important to realize that the home you can afford today could be quickly beyond your reach. 

Home prices rise and fall, but most people don't realize that the interest rate is what really has a dramatic effect on your home purchase.  Instead of watching home prices, smart investors watch interest rates.  In today's market, you can find Foreclosures, Short Sales, and bargain low low prices, but the REAL bargain is the low low interest rate.   

 For example:  if you buy a home today for $500,000 with 20% down payment

 •·         At today's low interest rate of 5%.  Your monthly payment would be $2147

 •·         If you buy the same home next month at a 6% interest rate, your payment would be $2398

 •·         If you buy the same home the few next months at a 7% interest rate,  your payment is $2661

That simply means you can buy more home for less money per month now than you can when rates go up. It also means that the home you can afford today, you might not be able to afford tomorrow.

 Continuing our example:   The amount you qualify for also changes as interest rates rise...

  •·         For a payment of $2150/month you would need to make approx. $5,657 gross per month

  •·         For a payment of $2661/month you would need to make approx. $7,002 gross per month.

What this means is you will need to make $1,345 per month to afford the exact same mortgage or buy a home that is about $77,000 less!

 Why the interest rate effects you more than price

Current forecasters expect a moderate rise in home prices in Orange County of 6% or more over the next 12 months.  Some are more optimistic, some are more conservative.  But even the more conservative projections for the lower price ranges is positive.

If you wait for prices to drop and if they happen to drop an unexpected 5% ($25,000) on a $500,000 home, your payment would only $107 less.  Whereas, the expected increase of interest rate to 7% would increase your payment by $513. 

How this also effects how much you get for your home when you sell

The problem with waiting for home prices to go up to sell is that when you do sell, you have to buy your replacement home.  Whatever gains you make by selling at a better time for a higher price will be wiped out by what you lose on the purchase of your replacement home.  If your home's value goes up, the price of the home you'll buy will equally go up. 

However, the big difference is the change in interest rates.  If you have a home to sell the demand for you home is highest while interest rates are low making it more affordable to more buyers.  A rise in the interest rates eliminates a pool of buyers for your home. 

Also, if you're Selling, the interest rate effects the purchase of your replacement home.  A higher rate means you'll make higher payments and be able to afford and qualify for less home.

These numbers are for illustration purposes only.

Please consult your mortgage professional for exact numbers and details.  Or I can help you evaluate your options.