Wednesday, March 25, 2009

Hitting Bottom....

There is a great deal of speculation out there as to when the proverbial bottom of the real estate market is going to occur. The fact of the matter is no one knows for certain and statistics vary state to state, region to region, city to city and n'hood to n'hood...you get the picture.

What we do know is that interest rates are LOW! Waiting to buy a home until prices hit bottom may mean taking a higher interest rate, as rates are anticipated to go up at some point.

My little stint on the local news station raised some questions from my loving husband and some of the locals at Smittys. "How", they say "do the numbers that you cited during the interview work out? Seems like fuzzy math!"

What they are referring is the statement I made about prices falling significantly and rates rising 1-2% which is a very likely scenario given all of the economic indicators. So I enlisted a lender partner of mine, Luann Davis at WR Starkey Mortgage to run some scenarios for me to prove my point. Now keep in mind, the term "nominal" is subjective depending on your economic status and comfort level, but I think these figures prove the point very well.

Assume a $200,000 loan amount-30 year conventional loan-4.5% interest rate (fixed)
PRINCIPLE AND INTEREST: $1013.37--TOTAL PAID TOWARDS PRINCIPLE (thus reducing your loan amount)-$3266 in the first year

Assume the price of the home falls 10% and your new loan amount is $180,000-30 year conventional loan-rates RISE ONE POINT to 5.5%, doesn't sound like a big deal--right? Plus, you got a great deal on the house, 10% off asking price (average list to sell is 3-5%)!! WRONG!
PRINCIPLE AND INTEREST: $1022.02!
So the payment is $9.02 higher and the TOTAL PAID TOWARDS PRINCIPLE in only $2424.76

Total cost of waiting for prices to fall is this scenario is $842 per year or an extra $70.17 per month!

Ok, so let's move on to a doomsday scenario...PRICES FALL BY 20%!
You are now only borrowing $160,000 but rates are at 5.5%--sounds great huh? You are really wheeling and dealing now! :0

You are right that your payments are lower, only $908.46, about $104.92 each month lower than the original scenario at $200,000 for a yearly savings of $1259.04. However, the principle reduction of $2155.32 is $1110.68 less than the $200,000 scenario at the 4.5% interest rate. This equates to a savings of $12.35 per month by NOT WAITING!

YOUR HEAD IS SPINNING...where do all of these numbers fit in you say?

Bottom Line (literally) :) **Thanks Luann!**

The lower rates equate to more buying power as opposed to waiting for lower prices.

Brooke

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