This post is a re-blog from Ilona Matteson. It is an excellent post for both home buyers/sellers as well as real estate professionals. Think how the market and economy would improve if the media started doing stories like this. Lets get the word out.
Trust me, even if you are math challenged this information is easy to understand! I was really good at math in school and now that I'm not practicing as much, I have to think about it a little more. So, if you're like me, until you see these formulas, you're probably not putting much thought into this simple math.
Let's say you have some Sellers that are thinking of moving up but haven't quite made the commitment. Perhaps this formula will help you.
- If they're currently in a mortgage of about $250,000 at 6% interest their payment is about $1500.
- For a $1500 payment over 30 years with a 4.5% rate, they can now borrow $300,000.
They can borrow $50,000 more and their P & I won't increase AT ALL!
- If they're currently in a mortgage of about $500,000 at 6% interest their payment is about $3,000.
- For a $3,000 payment over 30 years with a 4.5% rate, they can now borrow $593,000.
They can borrow almost $100,000 more and their P & I won't increase AT ALL!
What's even better is their rate of return. Let's look at what happens in a few years when the market stabilizes and even starts to appreciate again.
Without even doing the math, I know you can answer this one... If the market starts to appreciate say, 5%...which is better? 5% of $250,000 or 5% of $300,000? 5% of $500,000 or 5% of $600,000?
Now let's talk about buyers. We all have buyers on the fence today, right? They're waiting for the BEST prices and the RIGHT time to buy. They may end up hurting themselves if they are only thinking about price. Here's some simple math to use with them.
It takes MORE than a 10% drop in price to overcome a 1% rise in rates.
- $300,000 mtg - 30 yr term - 4.5% rate = P & I $1520
- 10% drop in price - $270,000 mtg - 30 yr term - 5.5% rate = P & I $1533
- $500,000 mtg - 30 yr term - 4.5% rate = P & I $2533
- 10% drop in price - $450,000 mtg - 30 yr term - 5.5% rate = P & I $2555
- So even if prices go down 10%, but rates go up only 1%, they will still pay slightly more in their P & I payment.
- It would have to be more than 10% drop in price to make it worthwhile.
- Now, in my market it has dropped 35% over 5 years. That's 7% a year.
- In 1.5 to 2 years, values could be 10% to 14% lower.
- Will interest rates still be 4.5% then? Not likely. THIS IS THE BEST TIME TO BUY!