Reduced Price vs Changes in Interest Rate

Clients often ask me about the effects of price vs interest rates on payments when purchasing a Denver area home. Since there is widespread agreement in the lending industry that 2010 will bring increased interest rates I thought I would put a post together that demonstrates their effects.

I am going to use a loan value of $200,000 for this example and strictly look at principal and interest.

• Financed amount = $200,000
• Rate of interest = 5%
• Term of 30 Years
• Payment = $1073.64 per month

• Payment with 1/2% Rate increase = $1135.58
• Payment with 5% Price increase = $1127.33
• As you can see a ½% rate increase has about the same effect on payments as a 5% price increase.

To take this just one step further.

• Payment with 1% Rate increase = $1199.10
• Payment with 10% Price increase = $1181.01
• As you can see a 1% rate increase has about the same effect on payments as a 10% price increase.

This clearly demonstrates that when you’re taking mortgage payment amounts into consideration with your Denver home purchase that you need to keep more factors in mind than price alone. Interest rates fluctuate daily with the market and even if you have a rate locked those locks are only good for a limited time period.

In a market where interest rates are threatening to increase, coming to terms on a home and getting the rate locked in may be the factor which has a greater effect upon your mortgage payment than trying to squeeze an extra thousand dollars off the price.

This is just food for thought when taking all factors into consideration for your next Denver home purchase.