The New Urgency

Along with gasoline prices, you may have noticed that interest rates have certainly inched up as of late. But in this market we often hear from buyers that there are so many houses on the market, they just don't feel any need to rush, or that they know that there will be more houses coming on the market, so they don't feel there is any urgency to buy right now.

While those statements may be partly true with regard to inventory – now and next spring – it's important to understand why there may very well be some urgency that's not readily apparent.

With every small advance we've made (and will continue to make) through this economic recovery, interest rates will most likely continue to inch upwards. Here are some concrete numbers to show what difference these incremental moves can mean to your borrowing and purchasing power:

• At 4.25%, the principal & interest (P&I) payment on a $250,000 loan is $1,229.85.
  
• At 4.875% (the rate as of 12/17/10), with that same $1,229.85 P&I payment, the loan amount would be $232,000.
  

• At 5.875%, that same payment of $1,229.85 would give you a loan amount of only $207,900.
  

• That means if you bought a home with a payment of $1,229 two months ago, you were able to get $18,000 more home for the exact same cost as today. That's a 7% difference. Waiting until rates hit 5.875% will mean $42,000 less home for difference of 17% difference.
  

Looking at this change over time:

• $250,000 at 4.25% = P&I of $1,229, whereas $250,000 at 5.875% = P&I of $1,479 for a difference in the payment of $250 per month for the same loan amount. That equates to $30,000 difference in payments made over just the first 10 years.
  
• Using those same terms, over the first 10 years, you would pay $96,190 in interest at 4.25% and $135,972 in interest at 5.875% for a difference of $39,782.
  

• If you'd made standard payments over those first 10 years and then went to sell, your principal balance (had you been at 4.25% ) would be $198,081. But if you were at 5.875%, your principal balance would be $208,053. Same initial loan amount. Same time in the home. But at 4.25% you're walking away from the closing table with an additional $9,972 atop of the $39,782 in interest you had saved. That's an overall difference of $49,754 in your pocket because you bought when the rates were 4.25% rather than waiting for a "better" deal when the rates had gone to 5.875%.
  

With the economy moving, albeit slowly, in the direction of a recovery, the rates (and eventually prices) will continue to rise. Is the picture (and level of urgency) getting any clearer now? J

[Stats courtesy of Bart Anderson, Edina Realty Mortgage]