Why do agents and mortgage brokers keep babbling about interest rates being at an all time low? Why does this matter? After all, maybe we haven't hit bottom yet right? What if my house depreciates after I buy it? I want to time it RIGHT and only buy a great deal and buy it at the bottom of the market.
I hear you. We all do. I promise, nobody wants to over pay for their home or see their value diminish in their home. However, your buying power is directly related to interest rates and if you are concerned about monthly payment, interest rates are definitely something to consider.
Check this out:
Interest Rates fluctuate but right now are hovering around the 4% range for 30 year fixed mortgages. Let's say you purchase a home for $150,000, an amount which here in Boise, Idaho you can get a pretty spiffy home right now. Here are some examples. FHA loans putting 3.5% down are pretty common loans around these parts and having the seller pay closing costs is also common.
So at a purchase price of $150,000 and 3.5% down you are looking to come in to closing with $5250. Your loan payment (principle and interest) with 4% interest is looking at roughly $691 (your taxes & insurance will depend on the property and the insurance company you choose and will be added to your monthly payment. )
Now let's look at your loan payment if interest rates go up to 5%. All things the same your payment will be $777 for the same exact house. At 6% (which is what interest rates were when I purchased my home back in 2005 - and by the way we got a rate of 5.875% and thought we hit the jackpot) you are looking at $867. A 2% change in interest rates affects your payment $176 per month! Remember, you are paying the same exact purchase price of $150,000 but your loan payment changes by $176!!
But your home may lose value, right? After all, that is a legitimate fear. But interest rates might also rise. So, let's say you wait to purchase and your home loses $25,000 in value, but interest rates also go up to 6%. In the same situation your payment will be $723. At 5% your payment will be $647.
What if the home only loses $10,000 in value? $140,000 at 5% interest rate with 3.5% down is $725 and at 6% it is $809.
So what does this tell you?
If you purchase now, a home for $150,000 at 4% interest with 3.5% down your mortgage is $691 (Principle & Interest Only).
If you wait and purchase a home for $140,000 but interest rates go up to 6% you will get your house for $10,000 less but your payment will be $809 - $118/month more even though the home costs less.
If the home is $125,000 but interest rates go up to 6% your mortgage is $723 - $32/month more than a home that costs $25,000 more.
Whether or not buying a home is the right decision for you is up to you, but take everything into consideration, find a trustworthy loan officer and real estate broker, ask questions and find out if it would be right for you.
Disclaimer: All loan scenarios are just an examples, your loan payment including principle, interest, taxes and insurance will be specific to your particular home and qualifications. Call me if you want to get more information or contact a loan officer to find out what you qualify for.
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