Is the mortgage rate or the purchase price more important? | Company

If you’ve been thinking about buying a home and have been hesitating because you’re just not sure of the right time, the following information is for you…

Trying to time the market to identify a moment in time to identify the right time to buy a home is an incredibly difficult business indeed. It’s like trying to locate a needle in a haystack. A better, more pragmatic scenario would be to look at your money, credit, and income and decide to buy a home based on your household budget.

It comes down to your income, your monthly expenses, and a good basic financial framework so you can make an informed decision. If all of that is in place, how do you determine what is the most important purchase price or interest rate? As interest rates continue to rise, your competition disappears. Rising interest rates eliminate your competitors. If you want to make an offer to buy a house and your competition is weak or non-existent, you hold all the cards and you hold all the power to negotiate a fair price for the house. After all, who wants to pay too much for a house?

How do we know you won’t pay too much for the house? It’s surprisingly simple: interest rates stimulate competition. In other words, because interest rates are so high, many are sitting on the sidelines waiting to see what the market does. This is good news for you as a smart and savvy buyer, as it allows you to negotiate the purchase price of the home. Negotiating a purchase price reduction from $50,000 to $100,000 in this environment is not out of the question.

Suppose, for whatever reason, you are worried about the falling market and housing prices, well, in most markets, rents are still in high demand. On the other hand, we all know that this interest rate environment is not sustainable and that long term mortgage rates will come down. When interest rates go down, borrowing power goes up, when borrowing power goes up, your competition goes up. More people will be after that same house at a 6 or a 5 percent mortgage rate than they will at a 7 percent mortgage rate. It’s just a hard fact. So, in other words, your $600,000 home today with a 30-year 7% fixed rate mortgage could very easily be a $650,000 or $675,000 or more home at a rate 6% mortgage assuming interest rates fall. The idea that housing prices will fall due to high interest rates is very unlikely, as rents continue to soar, long-term fixed rates are about to fall and the supply of housing remains weak.

Think of it like this: if you buy a house today, you can always swap the mortgage rate for something better when rates drop in the future. The way you should see it as an informed homebuyer should be something like this: a mortgage rate of 6.75% today, for example, could very easily be a mortgage of 5.75% in 12 months and a 4.75% mortgage in 24 months. Using a purchase price of $600,000 for the example above, this will result in lower mortgage payments of approximately $800 when interest rates drop through subsequent refinancing opportunities. Waiting to see what happens in the future can make sense if there are concerns about your credit, down payment, or money. If these elements are in place and your goal is to buy real estate and hold it for a few years, you will end up doing very well overall.

Scott Sheldon is a local mortgage lender; with a decade of experience helping consumers purchase and refinance primary residences, second homes and investment properties. Learn more at www.sonomacountymortgage.com.

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