# Interested in Interest Rates? How They Affect Your Next Home Purchase

By
Real Estate Agent with TNG Real Estate Consultants

January, 2010  In Your Apartment somewhere in Orange County

You're looking at buying a home in Orange County for \$500,000.  You have 20% to put down, and you have managed to maintain a good credit score of 690.  Your friendly Bank of America loan officer (we'll call him Paul) says today's interest rate for you with good credit is 5%.  "Not bad," you say.  Of course, you ask the million dollar question: "So, what would my monthly payment be?"  You hear Paul tapping his calculator throught the phone. "\$2,147 which includes principal and interest."  You scratch your chin and think about how much you and your spouse bring in for income.  After some rough calculations you say, "Ok, I think between the wife and I we can swing that, buuuuuuut, we want to wait out the market just a little longer.  We've been following what's going out there with the economy and the experts are saying home prices will drop another 6% this year.  "Ok," Paul says, "call me when you're ready."

March, 2010  Still in Your Apartment somewhere in Orange County

You just heard from a friend that used to do loans that the interest rate jumped up last week.  You're mildly interested and the news of a 1% interest rate increase doesn't seem that big of a deal.  But, you do know it will probably raise your payments if you were to buy that same house for \$500,000 so you give Paul a call.  "Hey Paul, it's me...just wondering what interest rates look like today."  You hear Paul clicking his mouse over the phone.  "Welllllll, it looks like we're at 6% now, little higher than last time."  (Which begs the next question): "Paul, what would our payment be on that house on Linberger Street now?"  Paul pauses and again that calculator sound..."Um, \$2,398 per month."  You pull out your own calculator.  "That's \$251," you hear yourself say out loud.  "That's right," Paul confirms.  You tell Paul that it's a real bummer and maybe you should have bought that house on Linberger Street a month ago, buuuuuuuut you really think prices will come down and, hey, they came down 2% since December.

June, 2010  STILL in Your Apartment somewhere in Orange County

"Paul," (you're on the phone with good 'ol Paul from Bank of America) "I heard (*gulp*) that the interest rates are at 7%!  Is that right?!?"  You hear a heavy sigh on the other end of the phone.  "Yes, that's correct, even with good credit."  And then comes the ominous death knell preceding your next question, "Paul, what does that mean for our monthly payment based on our 20% down on that same house on Linberger Street?"  Paul sighs again, "You're looking at \$2,661 a month."  You do a quick subtraction problem..."That's \$514 MORE than if I would have bought in January!!!"  Now my wife and I have to find a way to make \$514 more to afford the same exact house."  Paul, unfortunately can only offer you his apologies.

Dawn Workman
Veracity Real Estate Group, LLC - Camas, WA
Camas Real Estate Expert, MBA, 480-540-8100

Gulp indeed. Today is the day to buy.  Rates are low and so are home prices!

Jan 28, 2010 04:29 PM
David Saks
(retired) - Memphis, TN

Timing is everything, but an interest lockdown isn't a thing of the past, although I'm sure the situation varies for every buyer. The market is still volatile.

Jan 28, 2010 05:11 PM
Silvia Dukes PA, Broker Associate, CRS, CIPS, SRES
Tropic Shores Realty - Ich spreche Deutsch! - Spring Hill, FL
Florida Waterfront and Country Club Living

Very well explained example how interest rates affect the payment and affordability of property.  This buyer may not qualify for this loan any longer.

Jan 28, 2010 11:33 PM