Why Shouldn't I See If Prices Drop Further Before I Buy - It Could Cost You MORE, Is Why

The flip side of the coin is, what if prices down, but interest rates go up the way the whole lending industry expects them to do?  Financing a home purchase is a ying-yang, a balance, of how much money you want to pay now (purchase price, down payment) versus how much you want to pay over time (monthly payment which hinges on interest rate and also purchase price, along with taxes, insurance, HOA fee if any, etc.).  The following gives a concrete example of the interaction, and is helpful for those asking the question, Why buy now if prices might drop further?

I'm  sure you have a few buyers sitting on the fence and thinking I can just sit until I am sure we get the lowest price for a home.  They may ask, "Why Shouldn't I See If Prices Drop Further Before I Buy?"


Some may not believe that housing prices have stabilized and have shown improvement in the most affordable price ranges. New home builders are beginning to slowly release new products to the market here in Orange County. As the economy stabilizes further gains of improvement will emerge for housing.


The Federal Reserve has already been making public statements on their policy for not letting inflation run up as the economy begins to improve. They control inflation by raising interest rates to tap the breaks on the economy, not letting it pick up too much speed. The Fed's purchasing of $1.25 Trillion in mortgage-backed securities campaign is about to end March 31, 2010. The result of the government program has been lower interest rates.


With the current state of affairs with both housing and the economy it's not realistic to think interest rates will rise quickly soon. However, it was a little over two years ago when rates were two-percent higher. Chances are over the next two years interest rates will increase and, as they do, the cost of the financing is added to the total cost of the home.


Most borrowers think of the higher monthly payment as rates rise but the long term cost of loan increases dramatically as well. Let's say for an example a borrower purchases a home for $500,000, puts twenty-percent down and gets a loan in the amount of $400,000. These two examples show what the additional costs would be financing interest rates two-percent higher.


  • Interest Rate: 4.875%    Monthly Payment: $2,117
  • Interest Paid after 5 Years: $93,669      10 Years: $178,156    30 Years: $362,060
  • Total Cost of Loan: $762,060

If 2 percent higher  

  • Interest Rate: 6.875%    Monthly Payment: $2,626
  • Interest Paid after 5 Years: $133,682   10 Years: $257,559     30 Years: $545,977
  • Total Cost of Loan; $945,977


Difference of the monthly Payment: $511

Difference of Interest Paid:

  • after 5 Years:     $40,013
  • after 10 Years:   $79,403
  • after 30 Years   $183,917


Another way to understand how interest rates can affect a borrower's ability to purchase a home is to compare the payments to the purchase price. In order for the borrower to keep his payments the same if interest rates went up two-percent he would need to lower the sales price by twenty-percent, using the example above.  The rule is for every one-percent higher in the interest rate the purchase price would need to be lower by ten-percent in order to keep the monthly payments the same.

Now is the best time to purchase a home here in South Orange County.

Elite Home Sales Team

Instant MLS Listings & "Free" Market Analysis

Mark Paulson and Tim Lorenz


Lisa Delzompo (951-704-4559)

"May your home always be too small ... to hold all your friends!"

Is your home getting too small?  Need a FREE Home Valuation?  Preparing to Sell a Home?  Click here to submit a form online, or Call Frank at 951-326-7330 for a free consultation.

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Information is deemed reliable but is not guaranteed. Information is general and may not address your particular situation.  Do not rely solely on this or any information you find on the internet.  You should consult relevant professionals directly about your real estate, financial, etc., situation. 

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Comment balloon 1 commentLisa Delzompo 951-704-4559 • February 26 2010 04:31PM


I tell customers about how an increase in rates can offset any gains they may realize by waiting for values to drop. They really need to see it in real numbers before it makes sense to them.

Posted by Eric J, Dream Home Financing (Eric J - Dream Home Financing) over 8 years ago

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