Buying your new Irvine home……are you focused on PRICE or TERMS??

by Robert Mack on May 11, 2010

in Irvine Real Estate

This is a question that I ask all of my clients when I first meet them, and their answer is in almost every case…..”PRICE”, until I actually go over with them the difference.  One of my mentors always used to tell me….”Robert, price is NOW, but terms are LONG TERM AND FUTURE”.  This is so important because the typical buyer is a consumer, and 97% of the time only focused on price, while never taking into account the long term affect of interest rates!  In my opinion, PRICE should always be a secondary issue, with most of the weight being put on current interest rates.  As a rule of thumb, every 10% that home values depreciate, if the interest rates move up 1%, the payment is virtually identical if not just a bit more.Interest Rates

Take a scenaro where a buyer purchases a home in Irvine, Orange County for $500,000 with 20% down with an interest rate of 5%.  If you don’t take into consideration Insurance, HOA, or property taxes, the monthly payment is roughly $2,147.29.  Now let’s say that a buyer is only concerned about price and would rather wait for home prices to fall another 10% before buying (while not taking into consideration that interest rates may go up).  Well, lets just say for argument sake that the home is now worth $450,000 after 7 months of waiting and paying rent somewhere else, but during this wait period, interest rates have gone up to 6%.  Based on this scenario of a home purchased at $450,000 with a 20% down and an interest rate of 6%, the monthly payment would be $2,158.38 which is actually $11.09 more than if the buyer would have purchased this home 7 months ago at the higher price.

What most buyers don’t realize now is that this is probably the best case scenario if they are waiting for better prices, because the reality is that home prices will most likely not drop an additional 10%, maybe just 5%.  In addition, interest rates are very likely to go up to even 6.5% or more as the number of home sales increase and inventory decreases.  I know we are all waiting for interest rates in the 4’s, but let’s get realistic here….

Let’s look at this final scenario of home prices falling just 5% in that 7 month period.  Now that buyer has waited 7 months to purchase the same home at a 5% reduction which results in a final purchase price of $475,000, however interest rates have climbed up to 6.5%.  Now that same home has a monthly payment of $2,401.86 which is $254.57 more than the monthly payment associated with buying this home at $500,000 with a 5% interest rate!  On top of all this, they have most likely put their life on hold and continue to pay rent (which has zero tax benefits as they are not a home owner).

Now can you see how taking advantage of the lower interest rates now (regardless of price) will result in a lower monthly payment for you in the FUTURE, and overall payment for the SAME HOME???  Stop worrying about price so much and take advantage of the 5% interest rates, because once they go up, it will be a while before they go back down!  Do you want to pay less for a home or do you want to have a lower monthly payment?  It’s your call…..Stop focusing on PRICE and look at the big picture!

Any other questions or concerns or to get pre-approved for financing now… or email me anytime! 949-209-7309

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Post by Robert Mack

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