I have written about this in the past but it’s worth re-posting. When you only look at the price you leave yourself open to actually paying more monthly and over the period of the loan.
The following is an excerpt from an article written by Jay Papasan of Keller Williams International.
The truth is even a 10 percent drop in home prices is nullified by a 1 percent increase in interest rates.
The figure below illustrates how this works for a $250,000 home purchase and the relative likelihood of each scenario.
To figure out which was a smarter bet–counting on home prices to fall further or interest rates to rise–our research department took the last ten years of monthly home price and mortgage interest rate data and ran the numbers to see which was more likely: an increase in mortgage rates or a further drop in home prices. Here’s what we found:
- A one percent increase in mortgage rates is ten times more likely to happen than a ten percent drop in home prices.
- A one percent rate increase more than offsets a ten percent reduction in home prices.
- When interest rates fall by one percent, the total interest paid is almost three times more than the interest savings from a ten percent drop in home prices.
- The probability of both happening at the same time is ridiculously small, and homeowners would still pay 15 percent more in interest over the life of the loan.
Interest rates have dominated the news in recent months as we’ve shattered record low after record low. Potential home buyers need to understand the positive financial impact low interest rates have on the cost of home ownership and the thousands of dollars that can be saved over the life of a typical mortgage loan. For those who can afford to buy, trade up, or invest, our current market presents a lifetime opportunity.