31 August 2008
Market prices vs. Interest rates
Many factors contribute to the decision to buy real estate. Let's look at one:
Market prices and mortgage interest rates;
If you are financing a property, it is the interest rate that ultimately determines what you pay.
For example, let's say buyer "A" purchases a home today for $500,000, puts 20% down and mortgages $400,000 at 6% on a 30 year fixed rate.
Buyer "B" decides prices are still dropping and waits six months to a year to purchase that same home. If the price drops 10% over that wait period, buyer B would be able to get that same home for $450,000.
However, during that same time, if the interest rate goes up by 1.25 percent to 7.25 percent, even with 20 percent down and mortgaging only $360,000, Buyer B would actually be paying $10,750 more for that same house.
This means that although buyer "B" saved $50,000 on the purchase price, he paid $60,750 more for his financing. Ironically, the buyer who bought sooner and paid more saves over $67 per month on his mortgage payment. A small 1.25% increase in interest rate can more than offset a 10% reduction in purchase price.
A buyer needs to scrutinize the trends in both real estate prices and interest rates.
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