Rate versus Price Reduction

This is a great reminder from our friend Mike Ouverson at Waterstone Mortgage:

Since the Fed’s Mortgage Backed Securities purchase program ended, the markets have seen much more volatile price swings…and rates overall are off their lows. For potential buyers who are waiting to see if home prices come down a little more, that means the wait could well cost you more money in the long run.

Let’s look at an example to see why. Say a home buyer wants to buy a home that costs $300,000. But the buyer wants a better deal on the home, so she delays a transaction until the home is reduced by $10,000. If, in the meantime however, rates were to rise .75% to 6.00% and the buyer financed 90% of the purchase price, the amount of total payments over a 30-year term would be over $35,000 more than paying the $300,000 purchase price and locking in the 5.25% interest rate. In other words, the buyer would save $10,000 only to end up paying $35,000 more.

Now these prices and rates are just for the sake of example. But the point is that home prices are already very affordable…and rates are still low for now. So in the end, waiting for a home price to reduce may end up costing you much more than you expect if rates rise.

Today, 30 year interest rates are as historically low as 4.5% and 15 year interest rates are as low as 3.875% and aren’t expected to go much lower.

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