- This topic has 9 replies, 8 voices, and was last updated 18 years, 3 months ago by
Chris Johnston.
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August 30, 2006 at 10:16 AM #7382August 30, 2006 at 10:36 AM #33973
Carlsbadliving
ParticipantI don’t see rates rising that much. Here’s an example of them rising slightly.
A house today $500,000
20% down, loan of $400,000
interet rate 6.25% = 2,462/monthA house next year $400,000
20% down, loan of $320,000
interest rate 7.50% = 2,237/monthPlus if you choose to put down 20% in both cases you’ve saved $20,000.
I think you’re always better off to pay less for a house. You can always refinance later on.
August 30, 2006 at 10:40 AM #33974no_such_reality
ParticipantNo.
No. No. No. No. No.
That is the exact same mistake people make when they go buy a car. It is also the thinking that got us in this mess. They look at what their monthly payment is and not what they are paying.
Your friend needs to think about how big the hook she is on is.
She can be on the hook for $540,000 with a payment of $3500 month today. Or wait and only be on the hook for $440,000 (20% drop) and still have a payment of $3500 IF interest rates shoot up to 9.5%.
The difference is how easily she can walk away.
IMHO, the rate game is much less risky than the capital loss game of buying today.
August 30, 2006 at 10:41 AM #33975PerryChase
ParticipantIt would depend how long your friend plans to remain in the house. A low fixed rate would not help her much if she only lives in the house a few years. I would not buy a house now unless I planned to keep it at least 10 years. Focusing on monthly payment is fine as long as your friend won’t need to sell when prices are even further depressed.
There are too many factors affecting interests rates so no one can predict how high or low they’ll get.
I wonder the proportion of buyers who got fixed 30 year mortgages when rates were at 5%? I guess only a small proportion.
We’ll see prices decline then stagnate for 8 years. In those 8 years, there’ll be plenty of buying opportunities. Also new buildings with better technologies will continue to be built. Land that was previously not buildable will be developed.
August 30, 2006 at 10:45 AM #33977VCJIM
ParticipantProperty Taxes. Ability to refinance. Ability to gain equity through appreciation.
August 30, 2006 at 11:12 AM #33984ParticipantAny increase in interest rates, tightening of lending standards or slowing of the economy will all push buyers back to sustainable debt coverage (30% PITI ratio of income).
With median household income at ~$59,000, that’ll make max sustainable PITI coverage of $17,800/yr for a median household.
PITI coverage at current rates (6.25%) pushes home prices to $240K. If rates go to 8%, it pushes it to $200K.
Both are 50-60% below today.
Assuming people don’t have 20% down and use 80-10-10 financing. It pushes it to $210K at current rates and $180,000 at 8%. I used a 2% premium for the second mortgage.
August 31, 2006 at 4:52 AM #34076carlislematthew
ParticipantIf rates go up a LOT, then this will just drive the price down and the overall payment may therefore stay relatively level.
Personally, I think the best strategy is to save AS MUCH MONEY AS YOU CAN and buy when the rates are high. This is also hopefully at a time when nobody else is buying (due to rates, or whatever) and so you’ll find a nice place without some stupid bidding war.
Then, when rates come down, refinance!
You can’t do it the other way – once you’ve got the low rate, there’s nowhere to go…
August 31, 2006 at 6:09 AM #34077BikeRider
ParticipantAs others have said, if you buy at a time of historic low rates, the rates really only have one place to go and that is up. So, you’ve paid too much for the house, it will most likely drop in value and if you had to sell for any reason, you probably couldn’t. And you can’t refinance. People don’t want to think negative, but what if something in her life changes (illness, death in the family, long term disability, job loss resulting a new job with lower pay) and she can’t stay in that house. If the value has dropped, most likely foreclosure. I guess I look at things differently. A year ago I was cycling with friends and was struck by a car. I was hurt pretty bad, but have recovered fairly well and was only out of work for about eight weeks. But, it really made me think, laying in the hospital. My work provided short term disability, but I had no long term. If I had been hurt so bad I couldn’t have worked, it would have been a real financial blow. Now I have long term disability. Real eye opener that in seconds your life can really change.
August 31, 2006 at 7:44 AM #34084JES
ParticipantWow, when I logged on this morning and saw all your great responses I realized the true value of a blog like this. It makes sense to me now why it is almost always better to wait for a great price, especially now that we are at a point where we will likely see significant drops. Also, she is unlikely to stay in the house for more than 5 years anyway. During the last run up there were times when prices and rates were both low, and I’m thinking that we will see the same thing on the way down.
August 31, 2006 at 8:15 AM #34088Chris Johnston
ParticipantChris Johnston
iamafuturestrader.comRates are not rising right now, the 30 yr Bond has made a nice upmove, long rates are going down and have been for 2 months. The yield curve has once again inverted. If you look at 30 yr mortgage rates, they are less than what they were two months ago. It is speculation whether this will continue or not, but it is my belief that the Fed will be very hesitant to move short rates up again if the housing market rolls over. If they do not move short rates up next year, it is likely we will have a continued low interest rate environment for awhile.
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