Whenever we purchase any big-ticket item we first look at the price. Unless you are buying all cash, you must take into consideration the expense of financing your purchase. In real estate the expense of financing is the mortgage interest rate. Let’s take a look at how interest rates impact the monthly cost of a home.
If prices goes down but interest rates rise, it could mean an actual increase in the monthly cost. Look at the chart. Prices would need to go come down 10% to make up for one percent increase in mortgage rates. You could decide to wait on your purchase based solely on price (dumb), but if you think interest rates are going to rise in the future it probably makes sense to purchase now (smart).
Interest rates are at historic lows. If we look at interest rates since 2000, we find that the average monthly rate was 6.29%. That is more than one and one-half percentage points higher than where they stand today. Though experts are pulling back on their original predictions of 6% rates by the end of the year, there is growing concern that rates will start to rise. Bankrate.com does a weekly survey of analysts to determine how many think rates will increase in upcoming months. The graph below shows that the number expecting rates to rise has been trending upward over the last two months.
When considering whether it makes financial sense to purchase a home, make sure you are considering the cost not just the price.