Buying a house, be it your first or your tenth, is on a lot of minds these days. There’s no doubt, home prices are down. Home values in California fell 34% from last August. The median home price across the USA is down 9.5% from last year. However, interest rates are still at historical lows.

This begs the question: when do you buy? If you believe the price of housing will continue to fall, you may be tempted to continue to wait this out. But with mortgage interest rates hovering around 6% the era of cheap money to borrow may be ending.

Interest rates will continue to fluctuate; my crystal ball leads me to believe they will rise in the years to come. Housing prices may fall for some time still, but they will bottom out. So in 2008/2009, if you are in the market to buy property, you are faced with the dilemma of trying to time the “bottom” of the price market, or time the interest rates.

Throughout the 1970s and 1980s mortgage interest rates ranged between 8% - 16%. In 1981 alone interest rates fluctuated between 13.21% and 15.38%. Imagine making mortgage payments with those interest rates. For example, the median home price in the USA today is $203,100: for that size principal, the payment on a 30 year fixed mortgage at 15.38% interest would be ~$2,630.

Again, using the median home price of $203,100 and an assumed 20% down, at 6% interest a 30 year fixed mortgage payment would be $974.15. If rates increase a mild 2 points to 8%, the same payment increases $218.07 per month to $1,192.22. That’s $2,216.84 more per year.

If you double the price of the house to $406,200 and run the same equations, at 6% a monthly payment would be $1,948.30. At an 8% interest rate the payment jumps $436.14 per month to $2,384.44 - an additional $5,233.68 per year.

If you have saved a sufficient down payment - most lenders are looking for 20% these days - and are also emotionally ready to invest in property, now may be the perfect time. Instead of trying to time the bottom of the house price market, in the long run you may be better served by locking in a low interest rate.

-Michele Steinberg, FinanceGrrl

Related:

How to Pay Extra on Your Mortgage, Save Money
Jim Cramer’s Rules for Real Estate Investing
Renovate Your Home The Right Way

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This entry was posted on Thursday, September 25th, 2008 at 12:50 pm and is filed under People, current events, first home purchase, news, real estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.