Since home prices bottomed around 2012/2013, they’ve surged to new all-time highs, at least nominally (not inflation-adjusted).
After the housing crisis, home values lost about a decade’s worth of appreciation, but gained much of it back when real estate boomed, thanks in part to the record low mortgage rates available.
Unfortunately, home prices are predicted to be fairly flat over the next several years, and mortgage rates are expected to rise in 2019 (right?).
So should you buy a property now while rates are still low and home prices have foreseeable flat or even downward pressure, thanks to all that appreciation already baked in?
Or should you wait it out and let home prices pull back first, while hoping interest rates are still low?
Well, first things first, it’s nearly impossible to time the market. Anyone will tell you this, whether it’s a home or a stock or anything else.
Predicting the direction of anything can be a tall order, and real estate is no different.
Home prices are also regional, and nowadays hyperlocal, so it’s not like they’re the same throughout the country.
Not all home prices in the nation can be designated as cheap, average, or expensive – they vary tremendously, and so might their future trajectory.
At the same time, it’d be hard to argue that mortgage rates nationwide aren’t super low. So which is more important here?
Buy a House While Mortgage Rates Are Low? Or Vice Versa…
- It’s possible to pay more for a house while interest rates are low
- But also obtain a cheaper monthly mortgage payment
- And pay a lot less interest over the loan term
- Thanks to the availability of more favorable home loan financing
Let’s take a look at a scenario where mortgage rates rise and home prices slump to see which situation is more favorable to the home buyer.
Scenario 1: A More Expensive Home
Sales price: $400,000
Loan amount: $320,000 (20% down payment = $80,000)
Mortgage rate: 4.50%
Mortgage payment: $1621.39
Total paid including interest: $583,700.40
Loan amount: $320,000 (20% down payment = $80,000)
Mortgage rate: 4.50%
Mortgage payment: $1621.39
Total paid including interest: $583,700.40
Now imagine home prices fall 10 percent over the next year or two, while mortgage rates rise from 4.50% to 6.00%, which while possible, probably isn’t all that likely.
Scenario 2: A Higher Mortgage Rate
Sales price: $360,000
Loan amount: $288,000 (20% down = $72,000)
Mortgage rate: 6.00%
Mortgage payment: $1726.71
Total paid including interest: $621,615.60
Loan amount: $288,000 (20% down = $72,000)
Mortgage rate: 6.00%
Mortgage payment: $1726.71
Total paid including interest: $621,615.60
As you can see, buying the home at the higher price point with the lower mortgage rate results in both a cheaper monthly mortgage payment and significantly less interest paid over the loan term.
That could also make qualifying easier with regard to the debt-to-income ratiorequirement mortgage lenders impose.
However, the down payment is $8,000 higher on the more expensive house, which could prove a barrier to homeownership if liquid assets are low.
But we’re still looking at overall savings of nearly $40,000 with the larger, yet lower-rate mortgage.
Hopefully this illustrates the importance of low mortgage rates. Of course, there are a ton of variables that can come into play.
About Me
- Chris B Johnson Realtor
- Chris B. Johnson is a REALTOR® who Specializes in Short Sale and REO Transactions. Chris has been Certified as a California Association of Realtors HAFA Specialist, a National Association of Realtors Short Sale and Foreclosure Resource, Chris B Johnson Realtor is a Certified Distressed Property Expert, Certified Short Sale Negotiator, Certified Default Advocate and Certified Pre-Foreclosure Specialist. With a full time staff dedicated to short sale negotiations and transactions, we have been successful with (almost) every short sale to date. LinkedIn Pro UpNest What's Your Home Worth?
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