Eileen's Blog

How Do Interest Rates Affect Buying Power?

June 8th, 2011 11:11 AM by Eileen Denhard

The question on many people’s minds lately seems to be when should they buy real estate. Realtor® Greg Blatt of Dayton, Ohio gives his advice on how to navigate today’s market:

In today’s volatile real estate market, I am often asked by buyers: “Should I wait until the market ‘bottoms out’ before I purchase, or should I act now?” The best answer is…”That depends.” It depends on what you want to accomplish. Are you simply wanting to get the “cheapest price” on a house or are you more concerned about what your housing costs will be over the long term? As you know, there is a huge difference between “price” and “costs.”

First of all, it is impossible to actually “time” the market to the point of buying a home at the absolute “bottom” of the market. In the meantime, while you wait to “buy at the bottom,” what happens if interest rates go up? (and they will!) Let’s assume you want to purchase a median priced home at $250,000. If interest rates go up by just 1/4 of one percent (.25%), you will need to earn an additional three percent (3%) in income to qualify for the same $250,000 house. If you don’t expect your income to go up by 3%, then you must purchase a home priced 3% less. What’s worse, for every .25% increase in interest, it ends up costing you an additional $9,518 in interest payments over the course of the loan. Now, if rates go up by one full percentage point (1%), that would cost you $38,072 in additional interest over the life of the loan. What if rates go up 1, 2 or 3 percent while you’re waiting to “time the market?” What will you actually save?

We know that mortgage interest rates are at historical lows and will be going up. The question is “When will they go up? The window of opportunity for low rates may be only slightly opened. So, if you are thinking of buying your first home, a move-up home, a vacation home, downsizing or an investment property, right now may be your very best time to do so. Otherwise, it could end up costing you more…a lot more as rates begin to climb.

Read more: How Do Interest Rates Affect Buying Power? | REALTOR.com® Blogs
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Posted by Eileen Denhard on June 8th, 2011 11:11 AM



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