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    « 2011 RE/MAX Housing Market Outlook | Main | Woodland Trails - My Thoughts »
    Tuesday
    Nov302010

    The Hidden Cost of Moving in 1-2 Years

    Intellectually, most people understand that interest rates have a significant effect on their monthly mortgage payments however few know the absolute dollar impact it has on their pocket book.  My advice to anyone thinking of buying or selling in the next couple years is to adjust the price you are willing to pay for a home to account for the predicted swing in mortgage rates.  In the example below, a home currently valued at $600,000 would be worth only $565,000 to a buyer who doesn't plan to move until mid 2012.  Shocking isn't it?

    This is probably an appropriate time to acknowledge that I am not an economist or mortgage specialist however I am an avid reader and discusser of economics (it is after all hugely related to my job as a Realtor).  Listening to those much more adept at economic forecasts, I strongly believe that interest rates are at rock bottom (or very near rock bottom) levels right now.  While no one can predict with absolute certainty where they will be in a year or two years from now, many economists predict that rates will go up over the next few years.

    Here are the assumptions I used to reach my findings.  Please note that mortgage rates are examples only.  I am basing today's rates on typical rates I have seen in the market recently for qualified borrowers with good credit:

    Buyer - Suzy Q.

    Suzy recently moved back in with her parents to save money for a home.  She decides to buy a home for $600,000 with 20% down with a 25 year amortization and a fixed term of 5 years.  Suzy predicts that the housing market will remain relatively flat over the next couple years, especially if mortgage rates rise as predicted by many economists.

    Suzy's Costs - Today

    Closing/Move-In Date: January 2011

    Estimated Mortgage Interest Rate: 3.69%

    Monthly Payments: $2,445

    Interest Paid over 5 Years: $82,266

    Suzy's Costs - 18 months from now (assume interest rates have increased a modest 1% per year)

    Closing/Move-In Date - July 2012

    Estimated Mortgage Interest Rate: 5.19%

    Monthly Payments: $2,844

    Interest Paid over 5 Years: $116,725

    Additional Money Paid over 5 year Mortgage Term - $34,459.  

    Assuming prices remain relatively flat, Suzy will pay approximately $35,000 more over the 5 year term of her mortgage if she moves into a home in 18 months instead of today. 

    These figures can of course be adjusted to your situation.  Your mortgage rate predictions, future housing value predictions, down payment amount, sale price and borrowing situation will all have an impact on the adjusted value.  The principle behind this example is to demonstrate how much a swing in mortgage rates can impact your bottom line.  Before dismissing the thought of buying because you "expect prices to dip" or "want to save more of a down payment" or "think it is more profitable to buy a new build", I encourage you to run through this exercise and make an adjustment on the value you place on a home based on the impact of increasing mortgage rates.  This will allow you to make a more informed decision and could ultimately help you make a wiser investment. 

    Lindsay Walls is an Oakville Realtor who loves to connect people to the homes of their dreams.  If you have questions about the Oakville housing market, I would love to hear from you.  I can be contacted at 905.484.5162 or lindsay@remaxaboutowne.com.

    Regards,

    Lindsay

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