History Repeats Itself (Interest Rates)

Many would be homebuyers have not yet taken advantage of the lower home values we have witnessed over the last 5 years. In the last two years values have increased substantially but are still well below the previous peak in values from 2006-2007.

As the values continual to increase those still shopping for a home feel they “missed the boat” since they did not buy at the bottom. Many are hesitant to write an offer unless they feel they can get the property below market prices. While the attention and focus is on the sales price, the potential homeowner’s should examine the cost of financing as rates begin to increase as well.

In the spring of 2013 interest rates for home loans rose approximately 1%. Interest rates rose from the 3% range to the 4% range. Few truly understand how this increase has affected the true cost of the home over the length of the loan.

Let’s assume a sales price is $375,000 and the buyer puts 20% down to a $300,000 loan at today’s rates of 4.25%. This will have an interest cost over the life of the loan of $231,295. When added to the original loan the total cost is $531,295 for the $300,000 loan.

The same loan at 5.25% will have an interest cost of $296,380 over the life of the loan. That is an additional $65,085 for a total cost of $596,380. The monthly payment increases by $181 as well.

Using the same interest rate comparison but on a loan in the amount of $1,000,000 the interest cost increases by $216,950! This is based on just a 1% increase in the interest rates.

By examining the following history of interest rates one would determine rates are still low relative to their history and a tremendous amount of money can be saved by purchasing now and taking advantage of the current low cost of financing.

Please feel free to contact us with any questions you may have.

Content courtesy of The Kevin Budde Team at Prime Lending