I would like to illustrate an example of how important an interest rate can be in one's decision to purchase when financing. Suppose you were to have purchased when Interest Rates were around 4.75 percent, as opposed to waiting for 8 months time because you felt prices were going to be 5 percent lower, but in that time interest rates rose 1 percentage point. You wanted a 30 year fixed rate mortgage:
|
4.75 Percent Interest Rate |
5.75 Percent Interest Rate |
Purchase Price |
$300,000 |
$285,000 |
Loan Amount with 25% Down |
$225,000 |
$213,750 |
Monthly Payment |
$1,173.71 |
$1,247.39 |
8 Months worth Principle |
$2,296.28 |
$0 |
8 Months worth Tax Deductible Interest |
$7,093.38 |
$0 |
8 Months worth of Rent Saved |
$8,000.00 |
$0 |
8 Months worth of Expenses Saved |
$0 |
$3,200.00 |
Interest Rate Savings 8 Months |
$589.44 |
$0 |
Interest Rate Savings 2 years |
$1,768.32 |
$0 |
Interest Rate Savings 7 years |
$5,304.96 |
$0 |
Interest Rate Savings 30 years |
$26,524.80 |
$0 |
This example is meant to show you that there are important factors that go into trying to ‘time the bottom' and in turn, consequences. No one can predict the future and I want to stress that this is merely an example to show the potential amount of savings one could realize due to the nature of the interest rate affecting the bottom line payment for what could be a mortgage you have for 30 years. Plus, it illustrates the opportunity costs of sacrificing a lower rate for the uncertainty of an additional drop in prices. One must consider how long they feel they will be in this property, personal financial situation and credit score, opportunity to refinance if rates go lower but sacrificing that opportunity should rates never go that low again, and other items such as these. I did not tabulate any sort of totals in an attempt to have you analyze the numbers based on your personal situation to decide for yourself what your best decision would be. Please click here to take you to the mortgage calculator I used for this example. Again, this chart is strictly meant as an example of some various considerations that you should think about if you are contemplating a real estate purchase.
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