Are you in the market for a new home and wondering how to make the most financially sound decision? As seasoned REALTORS®, we are here to shed light on a counterintuitive strategy that could save you money in the long run: opting for a higher interest rate and a lower purchase price. Surprising, right? Let's break it down.
The Scenario:
Purchase Today
- Price: $500,000
- Interest Rate: 5%
- Monthly Payment: $2,908.02
- Total Payments throughout term: $174,481.20
- Paid on Principal: $57,462.09
- Owing at end of term: $442,537.91
Waiting for a 1% Interest Rate Drop
- Price: $553,000
- Interest Rate: 4%
- Monthly Payment: $2,908.89
- Total Payments throughout term: $174,533.40
- Paid on Principal: $71,591.75
- Owing at end of term: $481,408.25
The Analysis:
Purchase Today:
You buy your dream home today for $500,000 at a 5% interest rate. Over the term of your mortgage, your total payments amount to $174,481.20, with $57,462.09 going towards the principal. At the end of the term, you owe $442,537.91.
Waiting for a 1% Interest Rate Drop:
You decide to wait for a 1% drop in interest rates. The home price has increased to $553,000, but with a 4% interest rate, your monthly payments are still around $2,908.89. However, the total payments over the term are $174,533.40, with $71,591.75 paid on the principal. At the end of the term, you owe $481,408.25.
The Surprising Result:
Despite the higher interest rate in the first scenario, you end up owing $39,870.34 less at the end of the mortgage term compared to waiting for the interest rate to drop. The key lies in the initial purchase price - a lower purchase price today offsets the impact of a higher interest rate. Meaning you have a smaller mortgage due when it comes time to renew your mortgage for a new term.
Why Does This Happen?
When interest rates drop, home prices often increase. This is largely due to how consumers put emphasis on what their total monthly payments will be. When interest rates drop, buyers are more prone to offering more for the same home at the lower rate because it is in line with how much they can afford monthly. So, even with a lower interest rate, you might end up paying more for the same home. By buying at a higher interest rate and a lower price today, you secure a better financial position over the long term.
Conclusion:
In the real estate game, it's crucial to consider the bigger picture. While a lower interest rate may seem like an immediate win, the long-term savings could favor a higher interest rate coupled with a lower purchase price. Not to mention, a lower purchase price could also mean a lower deposit required.
As always, consult with your financial advisor and explore various scenarios before making a decision. The real estate market is dynamic, and the right strategy can make a substantial difference in your overall financial health.
