Many potential homeowners are in a state of indecision when it comes to making that big purchase. Unable to pull the trigger after witnessing the catastrophic events of the past few years, many are waiting to see if the estimated 5-10% drop in real estate prices is really going to happen. The main problem with that theory is this: Who really knows if there will be another drop in real estate like some are projecting? We could very well be at or near the bottom already. I personally believe that we will see another small drop in the next year or two, but when you take into consideration the low interest rates, the possibility of even a 10% drop shouldn't matter to today's homebuyer.
Let's take a look at the numbers:
10% price drop -
$200,000 @ 4.452% (todays rate) - $1410.00 (PITI)
Let's say that the market takes another 10% hit this next year. That $200,000 house would be worth $180,000. Now, what if the interest rate goes up one just one point?
$180,000 @ 5.452% - This would leave you with a payment of approximately $1379.00 (PITI)
$180,000 @ 6.000% - This 1 1/2 point hike would mean a payment of approximately - $1426.00 (PITI)
So, as you can see, you could end up saving $30 on your monthly payment, or maybe end up paying an additional $16 per month. Is that really worth the wait. What happens if prices don't fall a full 10%? What happens if interest rates go up more even more?
5% price drop -
In this example, let's assume that the market takes a 5% hit. That same $200,000 house would be worth $190,000. Couple that with a one point or one and a half point interest rate hike and this is what it would look like.
$200,000 @ 4.452% (todays rate) - $1410.00 (PITI)
$190,000 @ 5.452% - $1455.00 (PITI)
$190,000 @ 6.00% - $1521.00 (PITI)
By waiting a year and being right about prices falling another 5%, you would actually end up having a payment that would be $45 or more per month than if you bought today! You would have also missed out on the tax benefits of being a homeowner and one year of your 30 year mortgage would have been paid off.
The focus of homebuyers needs to shift from future home prices to the amazing interest rates that are being offered TODAY! There is no guarantee that prices are going to fall another 10% and it is a lot more likely that interest rates are going to go up at some point.
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