lower price is always best-even with higher rates
Posted: Thu Jul 03, 2008 6:19 amFrom the discussion on the blog I've seen some concern given for the possible rise in interest rates, which could off-set any benefit from declining real-estate prices.
My suggestion is to always go for the lower base price, regardless of the interest rate. You can always refinance in a few years when rates drop. However, if you buy at a high price refinancing will never be able to reduce the cost basis you started with.
A low initial price is always the best policy.
Of course, this assumes that mortgage rates will be rising in the next few years. If anything, I suspect mortgage rates will remain low, and may even drop further. We are entering a deflationary recession (where credit contracts from both the supply and demand side), which always feature low interest rates as investors race to put their money in the absolutely safest investments. T-bills, for example, will likely continue to have low interest rates as people become frightented of almost all other investment classes.
What will change, however, is the criteria for getting a mortgage. Yes, mortgage rates might well continue to be low 2 years from now, but the required downpayments and credit scores might be substantially more onerous than they are already. People with poor credit or little savings might find the mortgage markets completely closed to them.
Not that this is a good reason for someone to rush out and buy today (i.e. because they fear they won't qualify for loans in the future). If credit does indeed tighten further, do you really want to be caught owning a home that is depreciating significantly every year?
My suggestion is to always go for the lower base price, regardless of the interest rate. You can always refinance in a few years when rates drop. However, if you buy at a high price refinancing will never be able to reduce the cost basis you started with.
A low initial price is always the best policy.
Of course, this assumes that mortgage rates will be rising in the next few years. If anything, I suspect mortgage rates will remain low, and may even drop further. We are entering a deflationary recession (where credit contracts from both the supply and demand side), which always feature low interest rates as investors race to put their money in the absolutely safest investments. T-bills, for example, will likely continue to have low interest rates as people become frightented of almost all other investment classes.
What will change, however, is the criteria for getting a mortgage. Yes, mortgage rates might well continue to be low 2 years from now, but the required downpayments and credit scores might be substantially more onerous than they are already. People with poor credit or little savings might find the mortgage markets completely closed to them.
Not that this is a good reason for someone to rush out and buy today (i.e. because they fear they won't qualify for loans in the future). If credit does indeed tighten further, do you really want to be caught owning a home that is depreciating significantly every year?
