Look at the Payment First? Nobody Shops for Homes in Orange County That Way!

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Look at the Payment First? Nobody Shops for Homes in Orange County That Way!

But Maybe They Should!  Head’s Up Home Buyers – Here’s the Scoop on Rising Interest Rates

Three bedrooms or four?  A swimming pool?  Stainless steel and granite? Close to schools?  View of Lake Mission Viejo?  Most Orange County home buyers today are determined to get what they want in a home.  And waiting for prices to come down even lower.  The flip side of this equation, one that rarely gets a home buyer’s attention, is math.  The immutable results of calculating the mortgage payment based on current home loan interest rates as applied to the amount of the home loan.  Let’s take a look at the miracle of math in this scenario.

While Home Prices MAY Come Down, Interest Rates ARE Going Up

The first business week in December 2010 saw a dramatic increase in home loan interest rates.  Over the course of several days, the most favorable rates for buyers catapulted from 4.25% to 4.75%.  That’s a 12% increase in a matter of days.  Home prices certainly did not dip anywhere near 12% in the same number of days.  Take a look at how this impacts a home buyer in Orange County today.

Buying an Orange County Home at Today’s Prices and Interest Rates

Let’s just say that you are an Orange County home buyer sitting on the fence in today’s troubled economic times.  You’ve got predictable, documentable income; enough money available for a decent down payment and out-of-pocket closing costs; excellent FICO scores; and money left over as a safety net.  Congratulations!  So let’s say you find a house that meets 80% of your most important things to have in a home (because you remember the 80-20 rule, right?)  And let’s add that the house has a current market value of $600,000.00.  And the interest rate you qualify right this second, if you bought the house today, would be 5%.  With a 20% down payment, you’d be looking a loan amount of $480,000.00   That would put your mortgage payment, principal and interest on a 30 year fixed rate loan, at $2,576.74.  All in, you say?  Good for you.  Here’s a purchase contract – there are 5 copies – press hard when you sign.

Or Waiting to Buy…..

Let’s say you take a different approach.  You believe that home will come down to $500,000.00 pretty soon.  (Pretty soon – a subjective term used mostly by people with French Champagne taste and a domestic canned beer budget.)  So, pretty soon, that home amazingly does drop to a market value of $500,000.00 – a 17% drop in value!  Perfect.  Here we go – we’ll figure the best interest rate based on all of your sterling qualifications.  But rates have gone up 50% since you first found the home of your dreams.  Climbing up consistently since that first week of December 2010.  And now the best possible interest rate on the home that dropped $100,000.00 is 7.5%.  At the same 20% down payment, your loan amount would be $400,000.00.  And your payment would be $2,796.86.  That’s $160.12 MORE than the payment on the $600,000.00 price at 5.0%.

The Choice is Yours

So you tell me which scenario you like better – waiting for the market to take a dump and interest rates to rise, only to face the possibility of paying more every month for the same home?  Me?  I’d rather move in now, enjoy my awesome home and lower monthly payment.  Because the tea leaves I’m reading say home values are not coming down 17% in 2011.  And interest rates have already begun to creep back up.  Oh – just so you know – the average mortgage interest rate since 1971 is 8.1%.  You do the math and let me know what answer you get.

I’m Leslie, just keeping it real in Orange County Real Estate.  949-678-3373

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