Sunday, August 1, 2021 / by Ira Miskin
Buyers who are new to this market, and buyers who have not purchased a new home in recent years don’t remember when home loan interest rates averaged 6% - 7% for those with good credit and 10% - 20% down payments. Today, the very though of paying 3.5% scares buyers who think that’s an exorbitant rate!
Let’s take a closer look at the impact of interest rates on home pricing.
For every 1% interest rates rise, the impact on your monthly mortgage payment including principle, interest, property taxes and homeowner’s insurance (PITI) as well as mortgage insurance, is substantial. For example, on a $300,000 home loan at a 3% interest rate where homeowner’s insurance as $1500 per year and property taxes are $3500 per year, not including mortgage insurance, the monthly payment would be approximately $1680 per month. With a 1% rise in interest rate to 4%, that same loan would cost $1850. To keep the $1680 monthly payment your home loan would need to be $265,000. That means $35,000 more in down payment, or if your loan was a 3.5% down payment FHA loan, your buying power would be reduced from $310,000 for your home to $275,000 to purchase your new home.
Just a few years ago the home that sells today for $310,000 would have sold for $275,000. Higher purchase prices are a result of lower interest rates as well as the current shortage of homes for sale. Kind of a “perfect storm.”
The good news here, is that although you are paying more for homes in the current market, it still costs way less to finance the purchase with a low-cost home mortgage; and the likelihood of home values decreasing is always relatively low. The increase year to year in home values averages 3% - 4% annually. And because interest paid on a home mortgage loan as well as property taxes paid annually are deductible expenses off your annual income tax bill, in this current market it is almost like you are being paid to buy a new home.
Interest rates will rise and fall over the next few years, but likely minimally. If inflation and other market conditions do not become a run-away problem, the market will retain home values while interest rates stay within reason for the current supply and demand of homes.
The answer to the question “is now the best time to buy a new home?” is: With relatively “cheap money” available – home loans for most at continued historically low interest rates, and the cost of that interest and other expenses deductible from your taxes, investing in real property – a home you can both enjoy and build value in as a long-term investment is: Yes.
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