Interest rates vs. Sales price…Which is more important?

(Riverside, California)…Ok…so this may not be as philosophically important as the “chicken and the egg” debate, but if you are buying a home anytime soon (and in this market, you should be), you will need to know your own personal answer to this question to best determine how to proceed.  Each factor is important, but for you, one may outweigh the other, depending on your personal hot buttons.  So let’s chat.

SALES PRICE is the item most buyers fixate upon, and that is not necessarily a good thing.  What you pay for a home is very important, and as a general rule, lower is better than higher.  We get that.   However, if waiting for your “ultimate bargain” price means watching interest rates rise while you pant for a declining market to serve you up a lower price on your dream home, you need to be aware of the math…because the bottom line here is that the payment you make every month to your lender will affect you far more than the sales price number.  Strictly from a numbers standpoint, the sales price will only affect you in two ways….annual property taxes, and when you decide to sell the home. 

On the other hand, the INTEREST RATE is the gift that keeps on giving, since you have to live with that little rascal every month.  When we work with a buyer on helping them achieve their real estate dream, we start backwords.  We leave price alone, and begin with one simple calculation…how much money can you afford to pay monthly?

Now, let’s take a little time out here.  When we are talking about monthly payments, WE ARE NOT TALKING ABOUT ALL THE INCREDIBLY STUPID LOAN PROGRAMS OUT THERE.  We are talking about a very straight-ahead 30 year fixed rate loan, with a set interest rate and set payment every month.  Same payment every month, no surprises, until you either pay the loan off, sell the home, or refinance at a later date.  Our conversation here is not about all the ” micky-flicky” loan programs that created our current mess.  Simple, easy, conservative.

Ok, so back to our discussion.  Once we have determined a comfortable monthly payment, then that equates to a loan amount, and like magic, we are in business.  By the way, our monthly payment figure can either be the principal and interest loan payment only, or we can include the taxes and insurance as well.  Whatever is your preference.  In the end, we now have a loan amount for you, and that gives us a sales price as well. 

So which is more important, sales price or interest rate?  Let’s look at a few examples and you can decide.

We can use any amount, but let’s start with a $400,000 loan/sales price (for this discussion, we will assume they are the same), and an interest rate of 6.25%, which is what they are as I write this today. These two numbers would give you a monthly principal & interest payment (no taxes or insurance) of $2,463.  Now, let’s also assume you, the buyer, want to wait to see if the seller will reduce his price so you can get this home at $375,000 instead of $400,000.  OK.  If that happens, and the rate remains at 6.25%, then your payment would drop to $2,309 per month.  Cool.  Congratulations, you saved $154 per month.  We are all for that.

However, in this ever-changing economic climate (I am not being sarcastic..2-4 weeks ago, the rate would have been 5.75%) let us also assume that while you waited for the seller to reduce his price (could be 2 weeks or 2 months, who knows) the interest rate climbed only .5% to 6.75%  Now what?  Well, you would have your new lower price of $375,000, but at a higher interest rate….equating to a payment of $2,431 per month.  You would have saved $31 per month by waiting, but had the  interest rate increased to 7.0% instead of 6.75%, then you would be paying MORE per month ($2,492 vs. $2,431) than if you had simply bought the home at $400,000.  SO…be careful, and bring a very accurate crystal ball to your purchasing process.

When comparing all this, you can see there is no one definitive answer.  It kind of becomes a guessing game, and there is no way to predict the outcome.  All we know is that at some point, there is a diminishing return to waiting too long to buy if the rates increase to a point that your ultimate sales price ends-up costing you more money each month.  Every situation is different because every price is different.  Not surprisingly, the higher your loan amount, the more significant a role the interest rate plays.

So, in the end, what is the answer to  our sales price vs. interest rate question?  Our answer is that it depends on you, and the level of your purchase, because there is no universal answer.  A good real estate agent should sit down with you and take the time to show you all the variables to your decision…and then you can see for yourself what is best for you and your family.  And if the agent does not do this?  Does not take this time with you to explain all the ramifications to your decision?   Then give the agent a chicken, an egg, and sit them in a corner to figure out the question….and walk away to find a new agent!