Tuesday, May 20, 2008

A FOLLOW-UP TO OUR DISCUSSION OF INTEREST RATES

I received a couple of emails overnight about our posting on interest rates... interesting stuff!

Yesterday's post compared buying a home for $210,000 with 20% down at a 30-year fixed rate of 6.0% with buying a home for $189,000 (10% less) with 20% down at a 30-year fixed rate of 7.0%.

The premise is that, as the economy recovers - and even if housing prices fell another 10% (which they won't, at least here in Denver) - interest rates would have to go up as a consequence of the Fed flooding the economy with "cheap" money.

Here's the skinny:

Buying a home at $210,000 with 20% down would give you a loan of $168,000. Your monthly P&I at 6% would be $1,007. Over the life of the loan, if you never made a prepayment, you would pay a total of $194,608 in interest.

If you waited a year, and if homes fell another 10% in value, you would pay $189,000 for the same home. An 80% loan would be in the amount of $151,200, and at 7% interest your monthly P&I would be $1,006 (you saved a dollar). With the higher interest rate, you would pay a total of $210,937 in interest over the life of the loan, or $16,329 more than if you purchased today at 6%. However, since you opted to wait a year, you also likely paid rent for an additional 12 months, with no tax benefit or principal paydown whatsoever.

And, of course, if the market doesn't drop 10%, it's even worse.

I'm not telling you what you should do... there are many factors that go into deciding whether homeownership is the right choice for your circumstance.

But if you believe in today's low-rate environment that waiting out the market for another year is the "smart" choice, understand that unless you're an all-cash buyer, it's the lender who finances your loan who is going to be the real winner.