Friday, July 30, 2010

Rate versus Price Reduction

July 29, 2010

We thought this would be good for anyone who is studying the market right now in order to calculate the right time to buy or sell.


This spot was sent to me by Paul Basil with the Basil Nelson Mortgage Group at Prime Mortgage. http://www.basilnelson.com/

Since the Fed's Mortgage Backed Securities purchase program ended, the markets have seen much more volatile price swings…and rates overall are off their lows. For potential buyers who are waiting to see if home prices come down a little more, that means the wait could well cost you more money in the long run.

Let's look at an example to see why. Say a home buyer wants to buy a home that costs $300,000. But the buyer wants a better deal on the home, so she delays a transaction until the home is reduced by $10,000. If, in the meantime however, rates were to rise .75% to 6.00% and the buyer financed 90% of the purchase price, the amount of total payments over a 30-year term would be over $35,000 more than paying the $300,000 purchase price and locking in the 5.25% interest rate. In other words, the buyer would save $10,000 only to end up paying $35,000 more.

Now these prices and rates are just for the sake of example. But the point is that home prices are already very affordable…and rates are still low for now. So in the end, waiting for a home price to reduce may end up costing you much more than you expect if rates rise.

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