The Effect Of Interest Rates Have On Your Buying Power
Whether the sales price is more important than the interest rate depends on your perspective. All real estate is local. This means whatever is happening in your local market in Solano County, for example, could vary wildly from, say, the market in Manhattan. It’s pretty much impossible to time the real estate market, but you can try to take advantage of the way the market moves.
You can’t always predict how the market will move. But you can watch it move. Let’s look at historical interest rates for a 30-year fixed-rate mortgage. Generally, the rule of thumb is when interest rates go up, sales prices move down to compensate, but not always.
Rising Sales Prices vs. Declining Interest Rates
Say you are comparing a home in Fairfield that was worth $480,000 and your interest rate is 4.5%. If you were buying in a declining market and waited until that price fell to $420,000 but rates went up to 6.5%, you might be better off buying at a higher price. Yes, it is true. Payment on an 80% LTV mortgage for a $480,000 home at 4.5% is $1,945.68.
A payment on an 80% LTV mortgage for a $420,000 home at 6.5% is $2,135.74.
Put another way, if you paid $60,000 more for the home by paying $480,000 and lived in that home for 30 years, by the time you paid off your loan, you would have paid a total of $700,444,48
If you paid $30,000 less by paying $420,000 but paid on the higher interest rate for 30 years, by the time you paid off your loan, you would have paid a total of $768,866.40. In this instance, it is not better to pay less in exchange for a higher interest rate.