Should You Wait For Lower Prices or Lower Interest?
Should you wait for prices to go down or for lower interest rates? We advise that you do neither. The price of a home is fixed, so it makes sense to wait for prices to go lower, but you may not realize is that prices have to drop significantly to beat a minor fluctuation in mortgage interest rates.
Home prices have been rising for the past five years, sometimes in the double digits. Between January 2014 and January 2015, home prices rose over six percent.
So let's look at a few what-ifs and see when it's best for you to buy a home. Using round numbers, on a $200,000 30-year, fixed-rate mortgage at 4.00 percent, your monthly payment starting May 2015 will be $955. At seven years, the average length of time that most buyers occupy their homes today, you'll pay $52,898 in interest and the remainder of your loan will be $171,738.
If you wait around and interest rates go up, you'll be paying more monthly, plus you won't build equity as quickly. At 4.5 percent, your monthly payment will be $1,013 and you'll pay $59,828 in interest. Your loan remainder is higher - $173, 692. A half a point increase in interest will cost you $58 more per month, $6,930 more in interest, and you'll end up with $1,954 less in equity.
If your home dropped 5% in value and you were able to get a loan for $190,000 and 4.5% interest, your payment would be $963, a difference of $51 less per month than if you'd paid $200,000.
But what if you're wrong and prices go up by five percent? At $210,000 and 4.5 percent interest, you'll pay $1064 per month, $62,820 in interest, and the remainder on the loan will be $182,376. That's a difference of $109 more on your monthly payment and $9830 more in interest, plus you'll lose $10,638 in equity.
Why not buy now when both prices and interest rates are lower?
