Timing the Market/Interest Rates
Some potential homebuyers are waiting expecting to see a decline in house prices. While historically after gains like we've seen large price drops are unlikely- buyers must remember the factor that interest rates play.
What if the interest rate went up 1 percent while the buyer was waiting for prices to drop that same 5 percent? The same mortgage at 7 percent interest would mean monthly payments of $1,264 -- or $125 a month more than the 6 percent mortgage and even $65 a month more than buying the house at the full price while the interest rate was lower.
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| Price vs. interest rate |
|
| Sale price: | $250,000 | $237,500 | $237,500 |
| Down payment: | $50,000 | $47,500 | $47,500 |
| Amt. financed: | $200,000 | $190,000 | $190,000 |
| Interest rate: | 6% | 6% | 7% |
| Mo. payment: | $1,199 | $1,139 | $1,264 |
| 10-year interest paid: | $111,263 | $105,700 | $124,732 |
| 10-year principal paid: | $32,269 | $30,998 | $26,957 |
| 10-year total paid: | $143,532 | $136,698 | $151,689 |
The chart demonstrates that: 1) Over 10 years the buyer saved $6,834 ($143,532 minus $136,698) by negotiating the lower price while interest rates were low; and 2) that a 1 percent higher interest rates cost the buyer $8,157 more -- or $815 more a year -- despite the sale price.
Put another way, in order to make up for a 7 percent interest rate in the example, a buyer would have to get the sale price down to just over $214,000 and put almost $44,000 down in order to get the same monthly payment of $1,139 -- in this case a 14.4 percent price drop.