Hands On The Heartland
Checking The Pulse Of The Kansas City Real Estate Market
We’re seeing the most incredible mortgage interest rates in my lifetime yet many homebuyers are sitting the fence waiting to see if home prices will fall. The instability in many of our markets justifiably has investors moving cautiously. Yet it’s very important that homebuyers factor in the incredible low interest rates that we’re seeing today. If a buyer waits to see if home prices are going to drop and in the mean time interest rates spike upwards, there will clearly be an offsetting effect. Mortgage interest rates are eventually going to rise and, all other factors being equal, higher interest rates mean higher mortgage payments for a borrower.
Let’s consider a buyer who’s found the perfect home that today is listed for $200,000. In this hypothetical scenario, the buyer decides to wait and 6 months later he finds that his dream home is still on the market but now can be purchased for just $190,000. After doing a little victory dance, Joe contacts his mortgage lender and is informed that rates on a conventional 30-year fixed rate loan have jumped 0.5% in the mean time. Joe says he doesn’t care because he’s going to save $10,000 by having waited. There’s a clear flaw in Joe’s logic if interest rates have risen significantly during that time period. Check out the following two scenarios to see why…
Scenario 1 (Today’s market):
123 Oak can be purchased for $200,000.
Interest rates are 5%.
Buyer’s monthly principal & interest payment would be $1,074.
Scenario 2 (Down the road):
Home prices fall 5 percent and now 123 Oak can be purchased for $190,000.
But interest rates rise 1/2 percent and are now at 5.5%.
Buyer’s monthly principal & interest payment would be $1,079.
Scenario 3 (Down the road):
Home prices fall 10 percent and now 123 Oak can be purchased for $180,000.
But interest rates rise 1 percent and are now at 6%.
Buyer’s monthly principal and interest payment would be $1,079.
So if the price of 123 Oak falls 5% but interest rates rise a half a percent the monthly payment remains virtually the same! You see the same thing if a home’s price falls 10% but interest rates were to rise 1% over the same time period. For the sake of simplicity, these scenarios make the assumption of a borrower doing a 100% loan (no down payment). These examples show the importance of factoring in today’s interest rates when making the decision to move forward with a home purchase or waiting. When it comes to interest rates it could be a case of here today gone tomorrow.
Posted by Jason A. Brown
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