Recently, a trend has developed which puzzled me a little bit so I decided to do a little simple calculation to see what would make more sense.
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As people might have noticed, the mortgage interest rate has been creeping up quite a bit the past 3 months.? I remember when I almost put down a deposit for a house in March of this year; the interest rate was around 6%.? However, if you want to get a mortgage today, the rate would be more like 6.5%.
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The other trend is the declining housing prices.? There is no doubt that the prices of new and existing homes have been slowly going down these past months.? I regularly check the available houses in my price range around my area and there are just more houses available than say 3 months ago.? The other interesting thing is that many houses that are available from some of the higher priced neighborhoods were just not available to me a few months ago.
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So the big question is this.? Assuming that the mortgage rate goes up, but the price of the house goes down in the future, should you buy now?
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Consider the following chart:
| Principal | Interest Rate | Monthly Payment |
|
$300,000 |
5% |
$1610.46 |
|
$300,000 |
6% |
$1798.65 |
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Yikes, the difference of 1% is $188.19 dollars.
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Now, if the price of the house goes down by $50,000, then you only need to borrow $250,000 instead of $300,000 so look at the following chart.
| Principal | Interest Rate | Monthly Payment |
|
$250,000 |
6% |
$1498.88 |
|
$250,000 |
6.6835% |
$1610.46 |
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With this example, you will see that the monthly payment for $250,000 at 6% is only $1498.88!? In order for the payment to be the same as borrowing $300,000, the interest rate needs to be 6.6835% which is a difference of 1.6835%.
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In the above scenario, it is obviously better to wait for the price of the homes to come down.
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Dearest Fianc?, let?? wait (ahh I keep dreaming).
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{ 2 comments… read them below or add one }
Great analysis! I’m on the same boat right now trying to figure out when I should look more seriously at houses.
I’m thinking the prices are so high right now it might not matter whether it’s better to wait or buy now since I might not be able to afford either option!
Robert,
Good for you! I’m seriously looking into housing right now. (Actually, it’s more like my fiance keeps this subject in the forefront of our dinner conversations).
Anyway, I hope that one day I will be able to find our dream house!