Business & Merchant

Last Updated on Sunday, 31 July 2016 02:12

By Roger Dolanch Broker/Owner

Deciding which factor – home price or interest rate – is more important than the other can be difficult. Below are some tips to help you decide:

Monthly Payment

Let's say you started the search for your starter home when interest rates were 5%. You saw an ideal starter home for sale for $100,000. You researched your monthly mortgage payment for principal and interest on $80,000. That would be the amount you are mortgaging after a 20% down payment and your closing costs. Your monthly payment would be $429.36 a month over 30 years for principal and interest. You decide you don't like this payment and rate, so you decide to wait another year and the interest rate drops to 4%. However, a starter home in the neighborhood you wanted now averages $110,000. You put down 20% plus closing costs and you are left with a larger mortgage amount of $88,000. Your monthly payment on a 30-year mortgage is $420.13. Your payment dropped by roughly $9.23 a month but you are paying and additional $10,000 for the house.

Down Payment
Regardless of your interest rate on a lower-priced home, you can get into a home with less than a 20% down payment. In the example of the home that rose from $100,000 to $110,000, your monthly payment dropped. The question becomes would the lower payment help you if you didn't have an extra $2,000 for a larger down payment? The down payment amount difference could eliminate the possibility of buying the home you want, or knocking you out of the market altogether if you can't find a home in a less expensive neighborhood. That extra $2,000 for down payment can impact your ability to pay for unexpected home repairs, your emergency savings and even your ability to furnish your new home.

Can Low Interest Rates and Low Prices Unite?
Yes. As a matter of fact we might be living in this ideal situation right now. Interest rates and housing prices are relatively stable in Southwest Pennsylvania. How do you know how to be sure of a low interest rate? You can research historic mortgage rates via Google by searching “Freddie Mac historic mortgage rates”. For a true picture of how rates are today look at the last five years, or even go back further over decades for average interest rate highs and lows to gain perspective.

Movability
If you live in your home for 5 years or less, interest rates don’t seem to matter much, as long as you can afford the monthly payments. While there is never a guarantee that housing prices will appreciate or depreciate, historic trends indicate that the norm in our area is for property to appreciate. This leads to a sense of freedom for the future to be able to make a decision to move when and if the opportunity presents itself.

Refinancing
A big advantage to a lower home price versus a lower interest rate is that your home can be refinanced in the future when rates go down. Basically, this means that the problem with a high initial interest rate can be easily resolved when rates drop enough to make refinancing worthwhile. It grants a little extra financial flexibility to refinance when the property value has appreciated over and above the initial price paid.

Conclusion
The decision to buy a home should always be based on your ability to afford your monthly payment, your down payment, emergency savings, home repairs and furnishings.