Let’s take a look at the impact of both home prices and mortgage rates on your decision to buy a home.
Obviously, both are very important not only in terms of whether you should buy (from an investment standpoint), but also how much house you can afford.
At the moment, mortgage rates are very close to historic lows, with the popular 30-year fixed-rate mortgage averaging 4.09 percent last week, according to data from Freddie Mac.
But while rates are low, home sales are still pretty flat, thanks in part to high unemployment, a lack of consumer confidence, and perhaps inflated home prices.
home prices are well off their housing bubble peaks, many feel they’re still inflated (but housing prices are different depending on the regional markets around the country).
Home values have lost appreciation from the peak of the market, and are currently coupled with near-record low mortgage rates.
Home prices are predicted to be pretty flat over the next several years, but mortgage rates are expected to rise.
So should you buy now while rates are low and prices have foreseeable downward pressure, thanks to all that distressed/shadow inventory and lack of confidence?
Or should you wait it out and let home prices hit bottom first?
Well, first things first, it’s nearly impossible to buy at the bottom. Anyone will tell you this, whether it’s a home or a stock or anything else. Predicating the absolute bottom, or even close to it, can be a tall order.
Home prices are also regional and local, so it’s not like home prices have fallen by the same amount throughout the country.
And not all home prices in the nation can be designated as cheap, average, or expensive – they vary greatly.
At the same time, it’s hard to argue that mortgage rates nationwide are not very low and only expected to rise.
That said, let’s look at a scenario where mortgage rates rise and home prices slump.
Example on Conventional Purchase with 20% down:
Sales price: $400,000
Loan amount: $320,000 (20% down = $80,000)
Mortgage rate: 4.09%
Mortgage payment P&I: $1,544.38
Total paid: $555,976.46
Now if home prices fall 10 percent over the next year or two, while mortgage rates rise from 4.09 percent to 6.00 percent, which isn’t necessarily unlikely.
Sales price: $360,000
Loan amount: $288,000 (20% down = $72,000)
Mortgage rate: 6.00%
Mortgage payment P&I: $1,726.71
Total paid: $621,615.60
(FHA or VA loans require min. 3-1/2% or 0 down)
Buying the home at the current higher price with the lower mortgage rate results in both a lower monthly mortgage payment and significantly less interest paid throughout the loan.
That could also make qualifying easier with regard to the debt-to-income ratio requirement. However, the down payment is $8,000 higher on the more expensive house, which could prove a barrier to home ownership if assets are low.
But we’re still looking at savings of roughly $57,600 with the larger / lower-rate mortgage.
This illustrates the importance of low mortgage rates. Of course, there are many variables that can come into play.
And who knows, maybe rates will stay relatively low and home prices will fall even more than expected over the next few years.
Obviously, both are very important not only in terms of whether you should buy (from an investment standpoint), but also how much house you can afford.
At the moment, mortgage rates are very close to historic lows, with the popular 30-year fixed-rate mortgage averaging 4.09 percent last week, according to data from Freddie Mac.
home prices are well off their housing bubble peaks, many feel they’re still inflated (but housing prices are different depending on the regional markets around the country).
Home values have lost appreciation from the peak of the market, and are currently coupled with near-record low mortgage rates.
Home prices are predicted to be pretty flat over the next several years, but mortgage rates are expected to rise.
So should you buy now while rates are low and prices have foreseeable downward pressure, thanks to all that distressed/shadow inventory and lack of confidence?
Or should you wait it out and let home prices hit bottom first?
Well, first things first, it’s nearly impossible to buy at the bottom. Anyone will tell you this, whether it’s a home or a stock or anything else. Predicating the absolute bottom, or even close to it, can be a tall order.
Home prices are also regional and local, so it’s not like home prices have fallen by the same amount throughout the country.
And not all home prices in the nation can be designated as cheap, average, or expensive – they vary greatly.
At the same time, it’s hard to argue that mortgage rates nationwide are not very low and only expected to rise.
That said, let’s look at a scenario where mortgage rates rise and home prices slump.
Example on Conventional Purchase with 20% down:
Sales price: $400,000
Loan amount: $320,000 (20% down = $80,000)
Mortgage rate: 4.09%
Mortgage payment P&I: $1,544.38
Total paid: $555,976.46
Now if home prices fall 10 percent over the next year or two, while mortgage rates rise from 4.09 percent to 6.00 percent, which isn’t necessarily unlikely.
Sales price: $360,000
Loan amount: $288,000 (20% down = $72,000)
Mortgage rate: 6.00%
Mortgage payment P&I: $1,726.71
Total paid: $621,615.60
(FHA or VA loans require min. 3-1/2% or 0 down)
Buying the home at the current higher price with the lower mortgage rate results in both a lower monthly mortgage payment and significantly less interest paid throughout the loan.
That could also make qualifying easier with regard to the debt-to-income ratio requirement. However, the down payment is $8,000 higher on the more expensive house, which could prove a barrier to home ownership if assets are low.
But we’re still looking at savings of roughly $57,600 with the larger / lower-rate mortgage.
This illustrates the importance of low mortgage rates. Of course, there are many variables that can come into play.
And who knows, maybe rates will stay relatively low and home prices will fall even more than expected over the next few years.
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