For those of you who are waiting to buy, beware. If the market doesn’t continue to drop dramatically you could be losing some valuable buying power.
Consider a $400,000 home with FHA financing:
$400,000 purchase price
$ 14,400 down payment FHA
$386,000 loan
5% interest, payment $$2,072.13/mo.
If rate rises to 6%, payment would be $2,314.26/mo.
Assuming a buyer can afford payments no higher than $2,072/mo. If this is true, at 6% they can borrow no more than $345,613, meaning they can either pay no more than $358,149 for the home or must make a down payment of about $55,000 (instead of $14,400) to keep the payment the same. This equals about a 10% loss in buying power.
Now, consider an $800,000 home with conventional financing:
$800,000 purchase price
$160,000 down payment
$640,000 loan
5.5% interest rate, payment $3,633.85/mo.
At 6.5% interest rate, payment would be $4,045.24/mo.
Assuming a buyer can afford payments no higher than $3,633.85/mo they can either pay no more than $718,642 for the home or put nearly $225,000 down to maintain the loan amount. They will lose about 10% of his buying power.
The point is that if the rates increase while a buyer waits for that last 10% drop, they might be forced into a smaller home they don't like as much as the larger one the low interest rates make available today.
The interest rates I have chose are close to actuals but the effect of a rate increase is the same no matter what the final numbers are.
