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Lower Rates Better Than a Lower Price; FHA Limit $729,750

Yesterday’s stock market rally had little effect on rates, and there is little news today other than an $18 billion bond auction which could affect rates later today, depending on the market’s response to the auction.

As we mentioned yesterday, there is a strong possibility that the sharply increasing money supply could drive up rates significantly in the near future. We also made the point that buyers are much better off buying now with the currently available very low interest rates than they would be later on if rates increase even if values continue to fall. Following is a payment comparison for two separate purchases. The first is based on a purchase price of $250,000 at the current rate of 4.75%. The second is based on a 10% reduced price (for those clients who think prices might fall further) of $225,000, but a “1990s interest rate” of 8.5%. Keep in mind that for much of the 1990s, when there was little inflation, 30 year fixed rates hovered in the 8%+ range. If we return to 1970s inflation levels, interest rates will of course quickly hit double digits.

Scenario #1: $250,000 Price; 20% Down Payment of $50,000; $200,000 Loan at 4.75%; Principal and Interest Payment = $1,043 per month.

Scenario #2: $225,000 Price; 20% Down Payment of $45,000; $180,000 Loan at 8.50%; Principal and Interest Payment = $1,384 per month.

The payment is difference is $341 per month. Waiting for prices to drop could cost your client over $4,000 per year if rates return to only to 1990s levels.

If rates jump to 10.5% (for a $180,000 loan), the payment would increase to $1,647 per month – a $604 per month difference totaling over $7,000 per year!

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167