Higher Mortgage Interest vs Low Priced Homes

by MoneyNing

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 }

robert May 31, 2007 at 2:33 pm

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!

Reply

MyOwnMillions June 1, 2007 at 12:43 pm

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!

Reply

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