Waiting for Lower Interest Rates

by Dennis Martin, Littleton Real Estate

(Ed: Interest on home loans are near historically low rates. They are off the bottom but not by much. So, some buyers are waiting for lower rates to return. They hear that the Fed may continue to lower short-term rates. But, most economists say long term rates will likely trend higher.)

“I’m waiting for interest rates to drop before I purchase a home.”

Ever hear that before! Maybe it’s you waiting for interest rates to drop. But, consider this: Waiting for slightly lower interest rate is not always in the buyer’s best interest. First, long term interest rates are not likely to come down anytime soon…maybe never! Secondly, the small difference in an interest rate is much less the appreciation of the home which will inevitably happen.

First and foremost, who knows what interest rates are going to do. Yes, the rate was at 5 ½ % for a few days. But, since those days, rates have been slowly climbing.

Some examples to consider…..

Typical $200,000 home in Littleton, Colorado

1) $200,000 loan at 6% principle and interest payment: $1,200

2) $200,000 loan at 6.5% principle and interest payment: $1,264

Difference of $64.00 per month

Now,

1 year of interest difference 12 months x $64 = $768

5 years of interest difference $3,850

10 years of interest difference $7,650

Plus, consider this. Depending on your federal and state tax bracket, that difference is cut by 25-43%. Remember, mortgage interest is deductible from both taxes. Also you can refinance any time during loan period.

Now, let’s look at price of houses in today’s market in most areas of Denver Metro Area.

According to most statistics the home prices are at discounted prices from 2,3,4 or 5 years ago.

According to year to date Denver Metrolist statistics average sale price of homes is down 12.1% from 2007.

So a $225,000 house from 2-5 years ago can be bought for $200,000 or less today. How how much are you saving on the purchase? $25,000 less than you would have paid just 2-5 years ago.

What is that $200,000 home you purchased today going to be worth 2-5 years form now? Who knows for sure. But, price trends do change and when they change, they change pretty fast. It could easily be that same $25,000 or more from what you could have purchased it just a few years ago.

Now $25,000 savings, plus $25,000 increase for a total of $50,000. That makes way more sense then waiting for interest rates to drop ½%. The problem is that hindsight is always 20-20.

So, are interest rates than important in this big picture? Not likely. I remember selling homes in the 1980′s when interest rates were 12-16 %. We still sold homes. Those homes eventually appreciated way beyond their purchase price.

Oh! By the way, according to Wells Fargo: In 2007, the overall average home price (that’s different than the average sales price above) in Denver declined 2.2% ending seventeen year consecutive years of price increase. During that previous span, home values raised an average of 6.5% annually. Overall, since 1979 to 2007 Denver home prices have grown 255% on average.

How long can you afford to wait?

I really believe that today is a great time to purchase a home! You will just have to patient to see it 20-20 in hindsight.