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Waiting for Prices to Drop While Interest Rates Rise

There are a great many potential home buyers waiting and watching the market.  The greatest fear seems to be that home prices will decline even more in the next year or so.  It's valid to be concerned, but there are a number of factors that bear on the financial decision to buy a home.  Even if prices decline a bit more, it's easier these days to pick off a great buy well below its actual market value.  If you manage to scoop up a good deal at a price 10% below market, that 10% becomes a cushion for any short term price fluctuations.  However, there is one major factor in today's market that can make a purchase the perfect decision for you right now.  25 year lows are in place right now for mortgage rates. has been keeping records that long, and recent rates averaging around 4.5% for a fixed 30 year loan are lower than any previously recorded.  Another national survey showed that families in America move on average every 8 years.  Let's not go with the "end of the world" group, and assume that 7 or 8 years from now housing markets will have stabilized and prices should be appreciating again.  Even if they stay relatively stable, or appreciate minimally, there could be strong incentives to get off the fence and buy now.  First, of course, is the opportunity to buy below market or replacement value.  But, let's look at a comparison based on interest rates.  Recent mortgage rate quotes show average rates of around 3.5% for a 7/1 ARM, Adjustable Rate Mortgage.  Let's say there is a home out there that we can buy for $300,000 today, and that we're not really even getting a steal of a deal on it.  If we take out a 7/1 ARM at 3.5%, financing 80% or $240,000, our monthly payment will be $1078.  Making 84 payments (7 years), we would be spending $90,552 in principal and interest.  Now, let's say that we wait a year to see if prices drop more.  And, let's be pessimistic and say that the home we would have purchased then is now selling for 7% less, or $279,000.  However, very realistic predictions show that interest rates will be rising, and 6% is one estimate of where they may be a year from now.   Now we're financing 80% of $279,000, or $223,200.  Our payments over 7 years would now total $112,392.  That's almost $22,000 more, when we saved only $21,000 on the front end by waiting a year.  Let's not even count the rent we're out for the extra year.  None of these estimates are anything more than guesses, but it's a good exercise if your situation is one in which buying a home is your preferred goal right now.

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