Purchase Price vs Interest Rate … Was It Worth The Wait?
Sooner or later, every buyer I work with asks if the market still has room to drop. Unfortunately, what most don’t understand is that paying attention to housing prices is only part of the equation. What also needs to be taken into account is the interest rate at which a loan can be secured. For it is the combination of the purchase price and the interest rate that determines whether a buyer is getting a good deal or not.
To help understand this, consider the following scenarios:
- Purchase a house today at $500k using a 6.0% 30-yr fixed loan
- Purchase a house in 3 months at $475k using a 6.5% 30-yr fixed loan
- Purchase a house in 6 months at $450k using a 7.0% 30-yr fixed loan
Which is the better deal?
Although saving $50,000 on the purchase price sounds very enticing, it actually has no impact on the mortgage payments! That’s right, in this scenario, waiting 6 months for the price reduction saved you a whopping $3.89 a month:
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What did it cost you, though? Well, you risked 6 months of losing out on the house of your dreams. Another buyer who understood the importance of interest rates could have swooped in and bought the property while you were still waiting for the market to hit bottom.
So, unless you are extremely confident that interest rates are going to remain the same or be reduced, make sure that waiting for the price of your favorite house to drop is really going to be worth the risk of losing an opportunity to call it your home.
