Paying 7% Interest at $30k Under List Price is Better Than 3% Interest at $100k Over List Price
Coldwell Banker sat down with one of our agents, Larry Harley to talk about how interest rates and home prices are effecting today’s real estate. Here is what Larry said:
Well, of course someone was bound to run these numbers and check them out. So, I figured why not me? It would seem the definition of “better” might be in play.
In the first scenario, a $500,000 home that sells for $600,000 (sells at $100,000 over asking price) with 20% down, ($120K), at 2.99%, the interest-only monthly payments are $1,196 and fully amortized for 30 years is $2,021, plus property taxes of $600 per month.
The same $500,000 house selling at $470,000 (sells at $30,000 below asking price) with 20% down, ($94K), at 7% interest-only, monthly payments are $2,193, nearly double the first scenario, while the fully amortized payment is $2,501, $480 more per month, plus monthly taxes of $490.
While the taxes, down payment, and overall price paid are all lower on the less expensive home, the monthly loan payments are still higher. So, which is “better”? In the long run, an extra $480 per month in loan payments, minus $110 per month in tax savings, nets a difference of $370 per month more for the less expensive home. Multiply that by 360 payments comes to a total of $133,200 more over the life of the loan in order to save $130,000 on the purchase.
So, which is better? If they’re going to remain the same, the downward pressure on home prices will need to keep pace with the upward pressure on interest rates. These comparisons can be shown to both sellers and buyers for added perspective. Our challenge will be to convince the seller who’s trying to get the same $600K their neighbor got to be satisfied with $470K. On the other hand, if their replacement purchase price is also lower, unlike their neighbor who probably paid more, and if they can put more cash down, they could be ahead of the curve in an escalating interest rate market. Something else to let sink in.