Low interest rates are good for home buyers, right? They are also very good for home sellers. Let’s take a look at what this means. Let’s say a home buyer would like to purchase a $300,000 home. While there are loan programs out there that require little or no money down, we’ll assume the buyer in this example is putting 10% down. That means the loan amount on a $300,000 sales price would be $270,000 or 90%. The monthly principle and interest payments on a 30 year fixed rate loan of $270,000 at an interest rate of 3.5% would be $1212.42. Now let’s say the interest rate goes up to 4.5%. The principle and interest payments would be $1368.05, or $155.63 more per month. If the buyer can qualify for a maximum payment of $1212.42, the loan amount would now need to be reduced to $239,285. This means that a 1% rise in rate would lower the purchasing power of a home buyer by more than $30,000. OUCH! Now the total price this buyer can afford (assuming the buyer is still putting $30,000 down) is $269,285.
Now let’s assume you have a home you want to sell and it’s worth somewhere close to $300,000. You want to sell your home quickly for the most amount of money possible with the least amount of inconvenience. “But wait” you say. “Home prices are on the rise so maybe I should wait another 6 months or so.” Hmmm, let’s think about this. How much might a $300,000 home increase in value over the next 6 months.
In a press release dated October 2, 2012, the California Association of Realtors predicts median home prices will rise about 5.7% in 2013 after an expected increase in 2012 of 10.9% (click here for the article). So let’s say median price actually increases by 7% over the next 12 months. You’re thinking that you might put your home on the market in 6 months, so let’s assume price goes up by 3.5% between now and then. That means your $300,000 home will go up by about $10,500 and will be worth approximately $310,500 when you put it on the market. However, if rates increased, as in the example above, you would have eliminated a substantial number of potential buyers for your home by waiting.
Just something to consider if you’re thinking about buying or selling Roseville, Lincoln or Rocklin homes. See the chart below for historic rates over time.