How Do Interest Rates Impact Buying Power?

Currently interest rates are at an all time low, and the market seems to be slowing down a little. In Sunnyvale it is still a sellers market by numbers, the average home for sale last month sold for 6.3% over asking price but that doesn’t mean that its not a good time to start shopping and I’ll let the numbers tell you why.

If you’re shopping for a house, you might be trying to decide whether to buy now or wait and hope the prices start coming down. My advice is buy now. Let’s use an average priced house in Sunnyvale for example, $1,400,000 (about what you would pay over the current average asking price of $1,376,000). We’re going to see how interest rates will effect your purchasing power, you have 20% to use as a down payment $280,000.

Let’s say you buy now at 3.2% your payment is going to be around $4,843 a month, $58,116 for the year. Now let’s say, worst case, you decided to wait hoping prices would fall and they didn’t but interest rates jumped to 5% with every thing else the same your payment are now $6,012, $72,144 for the year. Thats a $1,200 a month or $14,000 a year jump, that’s enough to possibly put that home out of your price range.

To add insult to injury over the life of the loan you’ve almost doubled the interest you have paid. at 3% you would pay around $576,000 in interest over 30 years. At 5% you’ve jumped to $1,044,465!

You might be thinking though, “What if prices do fall then I would have screwed myself” And I want to say not necessarily. Let’s say you did wait and prices came down $200,000 and interest still went up to 5%. Your payment would be around $5,153 a month and life time interest would be about $895,254. So now you’re still $300 more a month than buying now and still over $200,000 more in interest over the life of the loan. On top of that you have now paid rent longer Which is money you’ll never get back.

So you tell me which is better, higher purchase price with low interest or low purchase price with higher interest (which in the example is still pretty low)? Lets say you do plan on waiting thinking that you can buy low and refinance when interest drops again. Then you would have to look at how long will you be paying a higher payment, when would interest rates drop to as low as they are now and what could you invest that extra money in if you bought now that would compound your savings monthly?

Just want to add a little disclaimer to this article, all of the facts and figures are estimates and do not include things like taxes, private mortgage insurance, or HOA dues. With that said you can do your own research about interest rates and monthly payments with any mortgage calculator online.

1.4 payment graph

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