Do interest rates have an impact on your home value?
While the answer to this question is often debatable, lets consider the buyer’s situation. Assuming a place where you could borrow interest-free and had the ability to make a monthly payment of $1,000 a month. Since there is no interest, this buyer can afford a mortgage where his monthly payment is $1,000.
Lets remove tax, PMI*, insurance since these are add-ons to a mortgage regardless of your interest rate.
With a 30 year fixed rate at at 0%, this buyer could afford a home worth $375,000 (excluding the above add-ons).
With a 30 year fixed rate at at 2%, this buyer could afford a home worth $275,000 (excluding the above add-ons).
With a 30 year fixed rate at at 4%, this buyer could afford a home worth $225,000 (excluding the above add-ons).
With a 30 year fixed rate at at 8%, this buyer could afford a home worth $135,000 (excluding the above add-ons). *These rates were as recent as 10 years ago.
Try some scenarios with a mortgage calculator.
As you can see, rates have a direct impact on a buyers affordability. In relation to US history, we currently have historically low interest rates. Will these rates climb over time? Some argue that the US economy is simply not strong enough to undertake rate hikes whether they be steep or gradual moves over time. This isn’t to speculate interest rates in the future but to consider your situation as you buy a home at a time of low interest rates.
Inflation has a role in money over time. This inflation that we have seen over time may often be misconstrued as home values appreciating, when in realty homes are adjusting to inflation. That’s not to say that homes do not appreciate. Demand in certain locales may often see gains. This information is to simply pose the question of your potential home purchase. If you get a great rate today, is it possible buyers can afford less in the future when you go to sell due to higher rates? Will inflation be perceived as a gain?
Entering the real estate market, you tend to be in a water table. This analogy simply means you rise and fall with your real estate market. If you you see a gain from your recent sale, it may be likely you’ll pay more for your next home assuming its in a market of similar demand and condition. All these open ended questions are simply to think about your exit from the real estate.
Depending on what you plan to do with the home will factor when you sell. Its important to understand that homes do not always appreciate and if you are buying at a time of low rates, consider something affordable. With the potential for a personal hardship in the unforeseeable future, you may have to consider refinancing. Although the federal reserve has eliminated some debt (money) on the books for banks, Quantitative easing has printed billions into curculation. Rates at that time may be lower, but they can certainly also be higher and the possibility of inflation may be likely. Therefore its always best to keep a low loan to value (LTV) ratio. This helps not only with PMI but with a future exit strategy.
To learn more about LTV click here
