Today’s Contest: Interest Rates vs. Purchase Price

Many homebuyers and potential buyers that need to sell their homes are so caught up in the price of the home that they forget to analyze the timing of the purchase and the effect interest rates play on the true cost of the home over time. Rather than holding out for a better “deal” (say 20 thousand off the purchase price) a home buyer would be better served by locking in a rate at 4% and avoiding the inevitable rise in interest rates. For example, a 1% increase in interest rate will cost you close to $40,000 in purchasing power on a $300,000 loan. So, at 4% interest lets say you buy a home with a $340,000 loan. If interest rates rise to 5% in order to get that same payment you could only get a loan of around $300,000. The point is, with these crazy low rates a buyer needs to seriously look at the timing as much as the cost of the home. And my example is just 1%. It really hits the pocket book when we get back to a more normal interest rate environment of 6.5 to 7.5 percent! For those of you buying your next home with cash then, yes, price matters. For the rest of us, interest rates make a HUGE difference in what we can afford.

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