How do interest rates affect your mortgage payment, and should you buy now?

Interest rates are at an all time low, with 30 year fixed rate mortgages ranging between 4.25% and 4.5% for the past month. Even with these incredible interest rates, buyers are still waiting for the housing prices to decrease.

The following chart shows how much of an effect interest rates have on home prices vs. the effect of decreased pricing.  These examples use more typical interest rates of 6-7%, but you can see that a decrease in home prices of 5% is offset by an increase in interest rates of only .5%.

A chart of how interest rates affect your mortgage paymentHere is an example that is more applicable to the Anchorage housing market where the typical single family home is between $250,000 and $375,000, and which uses the current interest rates:

If you are looking at a $300,000 home and are planning to put 20% down, your loan amount would be $240,000.  The principle and interest payment on this at a 30 year fixed mortgage rate of 4.25% would be $1,180 per month.

Let’s say the housing market in Anchorage decreased by only 5%.  During this time, let’s assume the interest rates went up 1/2% to 4.75%, which is still really low.  In this scenario, your purchase price would be $285,000 with a loan amount of $228,000.  The principle and interest payment on this would be $1,189 per month, $9 more than when the price was $300,000!

A 5% decrease in price is unlikely in our current economic conditions.  As many US real estate markets had huge declines, ours stayed fairly stable.  It’s more likely any decrease will be less than 3%.  Economic forecasters have actually said Anchorage is one of the top ten real estate markets they expect to recover and increase in value,  and they are projecting an increase of 20% by 2014!

Given the economic forecast for Anchorage and the extremely low interest rates, this is a great time to purchase a home.  It’s also a great time to purchase in some of the really depressed markets such as Michigan, Hawaii, Arizona, Florida, and Nevada.  If you are thinking of an investment property or winter home, let me know and I’ll be happy to connect you with an experienced real estate agent in those areas.

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