Two changes in the housing market encourage prospective homebuyers to contact real estate agents. The first is a decline in home prices, followed by low mortgage rates. Choosing which factor is more significant can have a significant impact in multiple areas. The most significant item might be in your wallet.
Impact on Monthly Payment
Suppose you began your home search when the interest rate was 4%. You observed a condo with one bedroom for sale for $100,000. You based your monthly mortgage payment for a 30-year loan on $80,000, the amount you would be financing after a 20% down payment and closing costs. Your monthly cost would amount to $382.
You decide that you can do better than this payment and rate, so you wait six months, during which time the interest rate falls to 2%. However, a condo in your desired neighbourhood now costs $120,000. You put down 20% plus closing costs, leaving you with a $96,000 mortgage. $355 is your monthly payment on a 30-year mortgage. Your monthly payment fell by $27. A mortgage calculator can illustrate how different interest rates affect your monthly payment.
Your monthly mortgage payment would have been $296 with a 2% interest rate and if home prices in your prospective neighbourhood had not increased from the $100,000 price point at which you began your search. You can gather the following data to input into a mortgage calculator to determine your monthly payments:
Figure Out Your Monthly Payment
Your monthly mortgage payment will be determined by the purchase price, down payment, loan term, property taxes, homeowners insurance, and interest rate (which is highly dependent on your credit score). Utilize the online mortgage calculator to determine your monthly mortgage payment.
Impact on Down Payments
In the example of the condominium whose value increased from $100,000 to $120,000, your monthly payment decreased due to a decrease in the interest rate. However, would the lower payment be advantageous if you lacked an additional $4,000 for a larger down payment? If you are unable to find a less expensive neighbourhood, the difference in the down payment could prevent you from purchasing the home of your dreams or take you out of the buyer's market entirely. In addition, losing this additional $4,000 will affect your ability to pay for unanticipated home repairs, reduce your emergency savings, and reduce your ability to afford to furnish your new home.
Existing Low Interest Rates and Low Costs
How do you determine a low rate? On the Freddie Mac website, you can find mortgage rates and housing prices from the past. In 2020, for instance, interest rates and home prices remained relatively low compared to the preceding and subsequent three to five years.
Obviously, there is no guarantee that history will repeat itself and produce additional relatively low-priced/low-rate housing markets. Despite the pandemic, house prices remained stable, according to property market analysts in a June 2020 Reuters poll. In 2021, experts anticipate another robust housing market. If you need to buy a home quickly, it is not always practical to wait for the market to improve.
Impacts on Movability
If you can easily afford your mortgage payments and plan to live in your home for less than five years, interest rates are less important. Although there is never a guarantee that housing prices won't drop further, you can view estimated housing prices for the last decade by selecting an address in the neighbourhood you are researching online.
Always compare neighbourhood versus national or city-by-city values. Patterns of home prices vary considerably from neighbourhood to neighbourhood and from state to state. If you purchase a home when the local real estate market is below its peak, the likelihood that you will be underwater (owing more than the home is worth) will be reduced.
The HOA Aspect
Not every home you consider will be in a planned community, gated community, or condominium with a homeowner association (HOA). However, if you end up in this situation, you should be aware that HOA fees are often more expensive for higher-priced homes and can increase when more homes are vacant.
HOAs cover shared services such as lawn care, condo upkeep, clubhouses, swimming pools, tennis courts, and/or private streets.
When fewer homeowners contribute, HOA fees increase. As with other historical information, you should contact prospective HOAs and inquire about their rates over the past decade.
Additionally, you should inquire about maximum fees and the factors that determine rate increases and decreases. Always inquire about HOA fees for every property you are considering. A slightly more expensive home may have lower HOA fees, especially if fewer services are provided. Ensure that HOA payments are factored into your monthly budget if you live in an environment with low interest rates, as they can be a significant burden.
Refinancing
The ability to refinance or modify your home in the future is an advantage of purchasing a home at a lower price than if the interest rate were lower. If interest rates fall, you can reduce your expenses. In essence, the issue posed by initial high interest rates can be mitigated in the future if rates decline.
If your current mortgage's interest rate is significantly higher than current rates, inquire with prospective mortgage lenders about the cost of refinancing. The cost can range from zero dollars to thousands of dollars. There is no assurance that mortgage interest rates will decline, but you can ensure you can refinance if they do.
The Bottom Line
Always base your decision to purchase a home on your capacity to pay the monthly payment, down payment, home repairs, and furnishings, even while maintaining an emergency fund. If you must move quickly, you should always consider factors such as HOA fees and the option to pay down your mortgage.
Ideally, you should purchase a home when both interest rates and prices are low. Calculate both the short- and long-term costs of a lower interest rate vs a lower purchase price if this is not possible. Make your move when the numbers make the most sense.