The Price/Rate Trade-Off

The Price/Rate Trade-Off

Currently, most people are concerned about where prices are headed and whether or not prices have bottomed.  However, one thing to consider as you are thinking about your first (or next) home purchase is the mortgage rate as most forecasts call for a 1/2 percentage point increase or more by year’s end.

Which is better?  A lower price or a higher rate?

The California statewide median price was $291,760 in May 2011.  At the same time, the average mortgage rate on a FRM was 4.64 percent (according to Freddie Mac’s weekly survey of mortgage rates), corresponding to a monthly principal, interest, taxes, and insurance (PITI) payment of $1,538 (assuming a 20 percent down payment and a 30 year term). If the price declines by 3 percent, the monthly PITI would drop to $1,492 saving $46 on the monthly payment.  What if the price drops by 3 percent, but mortgage rates rise by 1/2 of one percent to 5.14 percent?  The monthly payment would rise to $1,560, which is $68 more than the PITI for the lower priced home, thus wiping out any gains made from the price decline.

In the long-run, current mortgage rates can save you money

The Price/Rate Trade-Off

The bottom line is that minor price fluctuations have only a minor impact on the monthly payment, while even small changes in mortgage rates can make a big difference when calculating the monthly payment.

In the long-run, low mortgage rates should be a major deciding factor as rates are very likely to edge up over the next 6 months.  When you have rock bottom rates, they really have nowhere to go but up.  Waiting on the sideline could mean the difference between qualifying and not qualifying to buy a home.

This article and all information and graphs, are from the California Association of Realtors’ Market Snapshot report, viewable here.

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