This is a great post on the cost of waiting versus rising interest rates. So often, consumers are focused on only one aspect of the purchasing process: Rates? Price? Trends? The reality is there are a number of factors that should be analyzed in the home buying process. George just gave us one of the most important.
Yesterday I wrote a blog titled "Do you think the Interest Rate Is Going To Go Down?" That question is one that I get asked a lot from Borrowers at time of application, when they need to decide to "Lock" or "Float" the Interest Rate. I also get asked the same question when I am Pre-Approving Borrowers who are still undecided about purchasing a property now or wait. Many Borrowers are still expecting Interest Rate and Sales Prices to continue to go down. When I am Pre-Approving a Borrower who is struggling with this decision, I try to explain that There Can Be A Cost By Waiting To Purchase if Interest Rates and/or Sales Prices go up instead of down.
The Cost of waiting can have a two fold effect. If Interest Rates and/or Sales Prices go up, the same house will cost more. This is obvious, what is not so obvious is the lose of Purchasing Power if they guess wrong. Let me explain with the use of the chart below which is one of two excel spreadsheets that I have put together to quickly show Borrowers the reduction in their purchasing power if they wait, and Interest Rates go up. The one below is for FHA Mortgages.
Once I put in the maximum total monthly payment (principle & interest, taxes, homeowner insurance, MIP) that the Borrower can qualify for, in this case $1,500 at a 30 year term, it automatically calculates the maximum Sales Price that monthly payment will purchase at different Interest Rates. As you can see on the chart, if the most a Borrower can Pre-Qualify for is a total monthly payment of $1,500 per month, they will be able to purchase a house with a Sales Price of $186,612 at 3.5%. However, if the Interest Rate increase by even a small amount like .25%, they will not be able to purchase the same price house. An increase of .25% in the Interest Rate will cost them $4,291 in purchasing power, which will lower the maximum Sales Price to $182,321.
The above spreadsheet also let's Borrowers see quickly what their overall costs, and total interest that they will pay with each increase in the Interest Rate. For Example If the Interest Rate goes up by one full percent, the Borrowers will pay $22,297 more in Interest over the 30 life time of the mortgage, on a house that is $16,512 lower in price. That is a very high cost for choosing to wait.
The nice thing about using a spreadsheet like this, is that I can quickly show Borrowers not only how much purchasing power they are losing each time the Interest Rate goes up, but I can also quickly show them the same thing for lesser or higher amounts as well. Once Borrowers have visually seen that There Can Be A Cost By Waiting To Purchase, most often they come to the realization that waiting may not be such a good idea.
Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or firstname.lastname@example.org