Home Prices are back down where they should be! It is possible to buy a home and pay roughly the same per month as you would for rent on a similar house taking in account the tax advantages of deductible mortgage interest.**
I could not afford to buy a home in 2001 at $410,000. I had to wait until it went up to $455,000 (over 10%), before I could afford the payment.
In 2001 the interest Rate was 7.125% on a 30 year fixed rate mortgage. Assuming I had financed 90% of the purchase price ($369,000), my monthly payment would have been $2,486.02.
Because I waited until Jan of 2003 (more than 1 year later), to buy the property (after it had appreciated more than 10%), I was now able to afford the payment each month. My monthly payment was now only $2,436.76 at a rate of 5.93%.
I financed the larger loan amount of $409,500 and still had a lower payment compared to if I had purchased the home a year earlier for 10% less. That means I bought the house for $45,000 more, but will end up paying $17,700 less, for my home, over the life of the loan.
What is my Point you ask?
Rates are going up! Today’s buyer needs to realize that we are possibly at the best time ever to buy a home! Rates are still low……… but for how long?
If you wait until the price of the home goes down another 5% (to $475,000) but the rates go up 1% you will lose thousands of dollars! Look at the math:
This summary table displays the information needed to compare today’s home price and loan interest rates with the expected home price drop and interest rate increase. Each program shows a first mortgage on a 30 year fixed rate program. This shows that waiting for the prices to fall could possibly cost you more money over the next 5 years due to the expected interest rate increase of 1% over the next 6 to 12 months.
If interest rates increase as expected a five percent price reduction would give you a monthly payment of $2,529 per month compared to $2,381 if you purchased today!
Is it worth the risk of losing the house you really want to save 5% on price?
Home prices would need to fall by ten percent ($50,000), in order for payments to equal $2,381 at the higher rate of 5.875%. If you buy today your realized savings over 5 years would be $16,040.
Should you wait and hope that rates don’t increase like they historically have in the past after a low interest rate cycle?
The graph below shows the 30 Year Fixed Mortgage Rates over the past 10 Years:
Now is the time to buy a home!
Rates are still low and home prices have almost hit the bottom.
**I am not a tax professional and do not give tax advice. Consult your tax professional for details on your unique situation.
Category: Real Estate