Home Price vs. Loan Rate: Best-Deal Secrets
"There are all kinds of ways to look at it," says Stephen Slotnick, a mortgage consultant with Prospect Mortgage in Maplewood, N.J. "But my first questions to a borrower are always, 'Where would you be comfortable? How much can you afford on a monthly basis?' Because what a buyer needs to find is a home that -- between the cost of the home and the interest rate -- creates a mortgage payment that they can comfortably pay."
Slotnick pointed out that generally, a lower interest rate means you can afford more house. Which means, with interest rates at historically low levels, homebuyers are able to consider homes now that just two years ago might have been out of reach.
However, more house means a larger down payment. Consider the cost of a $100,000 home. The typical 20 percent down payment means the buyer would need to have saved $20,000 to purchase that home. If the home were $120,000, that buyer would need $24,000. No matter what the interest rate, the down payment would be the same. And so for many people, no matter how low the interest rate, the price of the home needs to be within their budget before they can get in the front door.
And buying a more expensive home with the intention of selling it for a larger profit should never be part of the budget equation.
"People should never look at their house as a way to make a killing," says Slotnick. "They should look at it as a stable, long-term investment, which will generally slightly outperform the rate of inflation.
"It's not normal for houses to appreciate 10 percent or 15 percent a year. And it's not normal for people to line up 15 deep to put an offer in on a home," he says. "All of those things were irrational, and we don't expect to see it again any time soon."
Something else that people don't expect to see any time soon: a better incentive to buying a home than the recent homebuyer tax credit. When the Obama tax credit expired at the end of April, some people believed that they missed out on one of the best bargains of the decade. But that's not the case. Interest rates are nearly 1 percent lower than last spring, when first-time buyers were receiving a one-time $8,000 tax credit.
In this case, a lower interest rate gives buyers a boost. For a $250,000 mortgage at a current rate of 4.5 percent on a 30-year mortgage, a buyer saves about $150 per month over a 5 percent interest rate last spring. "That savings will make up that $8,000 in a little less than five years," says Slotnick, "and it will keep on saving you money."
There is another issue that goes beyond interest rates and mortgages. No matter how low home prices or interest rates go, unless someone is certain their job is safe, they are not considering buying a home. That is the biggest obstacle for most buyers, says Slotnick. "With nearly 10 percent unemployment nationwide, people are afraid of making large investments," he says.
But for those who do have a secure financial situation, the current housing market a win-win for homebuyers.
Right now, advise many, the confluence of low home prices and historically low interest rates have combined to make this a great time to buy.
The bottom line, however, is to move ahead when you are ready. "Trying to outguess the market by waiting for the right price or the right interest rate doesn't work," says Slotnick. "When you are feeling comfortable with the entire cost of the mortgage and your personal job situation, that is the best time to buy."
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