WatchI'm toying with the following idea in terms of rent vs buy. A 4% mortgage vs an 8% mortgage. Same house at different prices for 4% vs 8%. Lets look at a comparison for similar payment terms:
4% loan
350k house
10% down (35k)
$1,503.86 each month for 30 years
Total Principal and Interest Cost Of $350,000 House: $576,388.95
First Month's interest: $1,050.00
8% loan
230k house
10% down (23k)
$1,518.89 each month for 30 years
Total Principal and Interest Cost Of $230,000 House: $569,801.36
First month's interest: $1,380.00
So if I plan on buying and holding for the 30 year period there isn't that big of a tax difference in terms of interest deduction (only ~4k/year deduction, maybe $1500 value?). Property taxes will be about an *extra* 1k/year, call it 1500 to be conservative. If the price falls to $230000, you should be able to rebase, but there is a risk there. But probably a $3000/yr *total* diminishing "cost premium" of buying at the more expensive price. Since it is diminishing, call it 50k over the life of the loan.
If you need to sell in less than a 30 year timeframe, you could be in "short sale" territory, and you would have your 35k down payment at risk of loss during that time. Other than that, am I missing additional risks or cost of buying the same house at 350k @4% vs 230k @8% ?
Follow
Befriend (3)
15 threads
5,627 comments
It's a flawed premise. House prices don't correlate with interest rates historically.
Follow
Befriend
1 threads
10 comments
One other thing I thought of. On a $230k mortgage, each additional dollar of payment during early years of the mortgage reduces the overall price paid by a much larger factor than each dollar on the low rate mortgage.
Follow
Befriend
1 threads
10 comments
And another.. on an 8% mortgage you *may* have the opportunity to refinance at a lower rate, whereas on a 4% mortgage you less likely have a chance of refinancing lower.
Follow
Befriend
1 threads
10 comments
And all this is implying to me that each dollar of reduced cost of a same house is worth more than the direct corresponding anticipated rise in interest rate to maintain equivalent payment. In other words the same house at $230k would have an overall cost breakeven at something like 8.5% or even 9% even though the monthly payment would be greater.
Follow
Befriend
1 threads
10 comments
tatupu70: Some of us disagree with your view that it is *not possible* that there is no further correction coming. I don't know whether a further correction is coming or not. I am positing that if a further correction does occur it may occur in conjunction with an increase in interest rates. If it occurs without such increase then it really is a no-brainer, so there is no need to explore that avenue.
If it does occur and it occurs in conjunction with a rate increase, I am trying to model logically and mathematically what equivalences there are in terms of payment, risk, and overall cost to prices today. Thus, even if there is a possible decline in price possible, I can anticipate the different cost models to determine price equivalents for today vs some such time in the future.
Oh, and thank you by the way, another risk of the 350k price is a market decline *without* the corresponding interest rate rise.
Follow
Befriend
10 threads
767 comments
Dublin, CA
The best way to protect yourself against price declines is to prepay the principal - try to pay off a 30 yr mortgage in the 8-15 yrs range. By doing this, any price declines will not be that detrimental. If you choose to buy another place (downsize or upsize), the new place will be subject to the same market forces given the same geographical area. However, if you only pay the minimum and want to move after 7 yrs, you could have issued if the market is flat and especially if it's declining. In fact with a short holding period and only paying the minimum, you are unduly reliant upon appreciation to cover the commish costs and in general to make it a winning pick over renting
Follow
Befriend (3)
15 threads
5,627 comments
codebug says
Huh? That's most certainly *NOT* my view.
codebug says
OK--I just wanted to point out that it's not a very likely scenario....
Follow
Befriend
1 threads
203 comments
The lower rate amortizes quicker. If you hold the property for a short period of time you'll have more principal at the lower rate.
Follow
Befriend
229 threads
2,774 comments
codebug says
That's the first question to ask yourself, how long do you plan to stay there? If you "have" to sell in 5 years or so (job loss), expect to lose a lot!
codebug says
There WILL be further corrections, DOWN.. The interest rates won't matter if you're underwater.... you ain't going anywhere...
If you have to buy no matter what (which I don't recommend now), like someone above said, your best bet is take the smallest loan, at the lowest rate for the SHORTEST term. This is the way to build equity the fastest, to keep from losing your deposit or going underwater as the house values continue to drop....