Time and the Value of $$$

By
Education & Training with Blue GMAC Realty

How are time and the value of money related?

Let's look at the following example:

You want to buy a house. The Contract price is $240,000.00. The loan is for $200,000. The term is 30 years and the fixed rate is 6%. Your loan payment would be $1199.10 / month. Total payout over 30 years is $431,676. Total interest paid is $231,676.

Therefore the lender will make $231,676. for lending you $200,000. 

Now let us consider the borrower who can not make a decision or wants to wait until home prices hit "rock bottom". If the borrower were to buy now, his scenario would look something like the above example. If, however, he waits until whenever, we can assume that interest rates will probably start to climb well in advance of the housing price increase, and he will wind up paying much more. Same scenario but interest is now 7%. Total interest paid is $279,017.

Which means the borrower will pay out an additional $47,341 in order to acquire the exact same home. Now, either the home must appreciate by more then 20% in order for the borrower to realize a break even, or the home must have been purchased at a 25% reduction from the original selling price in order for the borrower to break even. Either way, he would have been better off buying when money was at 6%.

If interest rates rise to 8%, then the repaid interst would be a whopping $328,311.

What are buyers waiting for??????

 

Comments (2)

Annabel Figueiredo
Exit Realty Group - Franklin Township, NJ

Tim,

I tend to agree with you.  There are still alot of buyers out there that focus on the home prices instead of looking at the (still low) interest rates they can get on the mortgage. 

Many of my buyers tell me that they want to wait it out until the home prices drop some more.  Although I am constantly advising them that the market has actually bottomed out and will get stronger (homes sell within $2,000-$5,000 of their listed price in my area).

It is so frustrating to get the buyer to look past what they are hearing in the news & to pay attention to what is actually going on around them.

Mar 28, 2008 03:56 AM
Fred Griffin Florida Real Estate
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

We invite you back to ActiveRain in the year 2017!

Feb 07, 2017 07:29 PM