Buying During a (Temporary) Rate Hike

Buying During a (Temporary) Rate Hike
Today's market represents an opportunity for buyers. Why? Because the increase in the interest rates to 7% (average) means that some of the prices are depressed. First, let's do the numbers - so they can tell us the story!

For a given $1.5M home in Berkeley, a buyer is paying 60% more for their mortgage at 7% compared with the recent low of 2.75% so many buyers are just holding back until rates drop but this may not be the smartest thing to do since prices will go up again when rates come back down. With many macroeconomic pundits predicting that mortgage rates will drop back down next spring, buyers who buy now could realize the benefit of a lower purchase price AND a reasonable interest rate. Let's take a closer look!

Let's continue to use the example of a $1.5M Berkeley home assuming 20% down and average property tax and insurance costs and let's say for argument's sake that prices are depressed by 20% right now so this house actually sells for $1.2M.
Buy Now

Purchase Price: $1.2M
Down Payment: $240k
Interest Rate: 7.0%
Monthly PITI: $7,980 (drops to $6,646 at 5% after 6 months)
Buy Next Year
Purchase Price: $1.5M
Down Payment: $300k
Interest Rate: 5.0%
Monthly PITI: $8,378

So you can see that the buyer who buys now starts out with a lower payment and then refinances into an even lower one AND realizes $300k in appreciation in 6 months. Not bad! It's important to understand that the property taxes are lower and will stay that way as long as they own the property due to prop 13. In this scenario the early buyer saves $123k worth of property tax over the 30 year span of the mortgage. Of course no one can predict future rates or prices but then again there is no reward without risk!

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