That is the million dollar question. The fact is that no one knows for sure exactly where the bottom of the market is. On any given day, you can find a variety of opinions on the subject. Although no one knows where the exact bottom is, it is clear that we are in a bottoming process right now. Home prices and interest rates are definitely closer to the bottom than they are to the top. We still have some more economic hurdles to deal with – the credit card industry, commercial real estate, job losses…but it is unlikely that interest rates will go much lower than they are right now. On Tuesday last week, Ben Bernanke (Chairman of the Federal Reserve) said, “the Fed needs to make sure it raises interest rates at the appropriate time, and not keep rates too low for too long.”
According to the Mortgage Bankers Association, 78% of all mortgage loans being done right now are refinances. It is stunning that in this unique market of 40-year low interest rates and great home prices, more people aren’t taking advantage of this incredible opportunity.
What is the fear? It’s simple. People are concerned that if they purchase a home today, it may be worth less tomorrow. But if that were to happen, does that mean that you would lose money?
Let’s take a look and see. Here is an example of a home that was purchased for $400,000 with 20% down and an interest rate of 4.75%, along with a comparison of what it would look like if this homebuyer decided to wait and sure enough, one year later the price had dropped $50,000 to $350,000. Interest rates, however, are likely to have climbed back up. We’ll use the average interest rate over the last 24 months of 6.250% for this example.
As you can see, by waiting, even though the price of the house was $50,000 less, this homebuyer is actually going to spend $55 more per month.
Over the 30 year life of the loan, the house that was priced $50,000 less, will actually have cost $9,705 more with a higher interest rate.
Even though he put $10,000 lesss down, he will spend $19,705 more in actual payments, $59,705 more in interest.
So much for waiting for the bottom to save money. As long as you are buying a home for the long term, not just to flip it in a few months or years for profit, you may actually be better off to buy it now when the combination of interest rates and home prices is so low, than you would be to try and time the bottom of the market, which is impossible to do anyway.