Vote for Seattle Bubble yet again!
Seattle Bubble wins again, advancing to the Quarterfinals of the Metroblogging Seattle contest. Take a few seconds to vote for Seattle Bubble yet again, because we can!
Please vote in this poll using the sidebar.
Which would you prefer?
- Today's home prices at 5% interest. (17%, 32 Votes)
- 20% off today's prices at 8% interest. (83%, 159 Votes)
Total Voters: 191
This poll will be active and displayed on the sidebar through 02.23.2008.
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Let’s assume you have $50,000 to put down. Take a look at the difference in monthly principal + interest payment, and total monthly costs after taxes:
Today’s Prices, 5% interest:
$400,000 home = $350,000 loan = $1,879 per month
Total Monthly Cost = $2,824
20% off, 8% interest:
$320,000 home = $270,000 loan = $1,981 per month
Total monthly cost = $2,681
Total monthly cost includes principal, interest, taxes, insurance, utilities, maintenance, PMI (if applicable), and income tax savings. Insurance and utilities are unchanged between the two scenarios, though I would think that it would be slightly more expensive to insure a more expensive house.
And if interest rates go down, you can always refinance that 8% at a lower rate. The same can’t be said for the purchase price of the home.
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Is this a “how many of my readers are morons” test?
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I think this is a “how many readers have a sizable down payment saved up” test.
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Hey, some people put a high value on a lower interest rate. I don’t really understand why, so I thought a poll like this might bring on an interesting discussion where people could explain why they would choose one option or the other.
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Sounds like a “How many readers own a home already” test… (i.e. at a higher appraisal and lower rate they’d make out better, verse a lower rate and low “equity”).
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Tim – I assume that the difference between the two is taxes and PMI?
I agree with some of the other readers. If I have enough to not pay PMI, then the lower interest is what I want.
One thing that I have noticed is that when prices are going up to a bubbly price, the people who win are those who are downsizing, because essentially they are cashing out of the pyramid scheme.
When prices are going down, anybody upsizing their house wins (and I include people going from rent to buy in this). Even if you lose equity in the house you own, the drop in price of a more expensive property more than makes up for it.
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Ben, I would disagree that someone moving from renting to owning is winning. Obviously if they buy the property at the bottom of the curve, they win, but if they buy and it declines 20%, I fail to see them as winners.
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this is a valid question esp here in CA where the prop tax is based on market value
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For the old-timers out there, you need an option of 50% off and 15% interest rates (or whatever makes the monthly payment the same).
If all monthly payments are equal (Same $2500 a month), it is always better to have a lower purchase price on the home. This is because you might be able to make additional payments. If you had a 30% rate and payed $2500 a month, ever extra payment during the first couple of years of the mortgage would chop several months off your mortgage. If you had a 0% rate, an extra payment would chop exactly one month off your mortgage.
Additionally, high rates means higher returns for real investors. That’s right, pension funds and the like would love to have high rate and relatively safe investments like a 30% return on mortgages.
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What I really do not want:
To buy at todays prices and 5% interest, and then decide to sell and move (perhaps out of country) at 80% of today’s prices..
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I chose the lower rate. The reason was the simple fact that over the 30 year loan I would pay a lot less interest, ceteris paribus.
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Based on my spreadsheet dabblings, it’s not a linear equation so there is no dominant strategy. it depends on how much downpayment you have, as you are trading off paying a smaller loan at a higher rate vs. a larger loan at a higher rate. Run Tim’s scenario at $100k down and the payments are basically even.
It’s good to look at this – but there is by no means a definitive answer. But by and large, you need a pretty good market crash to beat a 60% (from 5 to 8%) increase in interest rates. That assumes you can’t refinance some where along the way – but you need to run scenarios/what ifs to come up with a defensible answer.
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I’d choose the higher interest rate. With a lower purchase price, you can pay off the home sooner and be debt free.
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Thanks Monica, this was starting to get scary.
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I’d vote for higher interest rates since mortgage interest can be deducted and the loan could potentially be refinanced in the future.
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WestSideBilly,
Yes, what I mean was if you buy near enough to the bottom, then you can win.
I don’t think that timing the bottom is that important either. Eventually the prices will start to go up again (a few years from now, when fundamentals are driving the prices more).
To rephrase my point, it is better to buy in at the bottom and sell out at the top :)
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33% off-price @ 12% interest rate
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