"Patrick, it seems interest rates will continue to increase. Doesn't this mean that house prices have no other option but to go down since most Buyers won't be able to afford to qualify for a
What happens if prices drop ⬇️ and interest rates ⬆️increase??
Dated: 12/10/2018
Views: 232
"Patrick, it seems
We have to calculate the cost to carry the interest rate on a lower priced property.
Here is the potential scenario we will call
Scenario A:
- House price - $500,000
- Interest rate - 2.99%
- Amortization period - 25 years
- Payment Frequency - Monthly
Mortgage monthly payment = $2,363.66
Mortgage balance at the end of 5 years = $427,291.07
Assuming you continue to have the same mortgage terms for the 25 years period:
- Total of payments = $709,099.13
- Total interest paid = $209,099.13
Scenario B:
- House price - $450,000 ($50,000 price drop)
- Interest rate - 4% (rate increases by 1.1%)
- Amortization period - 25 years
- Payment Frequency - Monthly
Mortgage monthly payment = $2,367.09 (+$3.43 difference)
Mortgage balance at the end of 5 years = $391,742.69
Assuming you continue to have the same mortgage terms for the 25 years period:
- Total of payments = $710,127.44
- Total interest paid = $260,127.44
What does this all mean? Looking at both scenarios which one is ideal?
There are 2 obvious points. One house is $50,000.00 less. However, the lower priced house has a higher interest rate (1.1%). Looking at the total interest paid, you can see that the interest rate cost wiped out the $50,000 price drop.
Interest Paid - $260,127.44 - $209,099.13 = $51,028.31
The interest rate increase actually cost you an extra $1,028.31.
Don't underestimate the interest cost. You might think you are going to save money waiting for a major price drop but all of that savings can easily get wiped out by higher interest rates.
If you are in a position to purchase now go for it so that you can enjoy the benefits of homeownership. Waiting for the perfect time rarely ever works.
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