While you were trying to negotiate your way into a good deal, you might have talked your way out of a good deal. One thing we’re seeing quite a bit is home-shoppers becoming laser focused on trying to negotiate sales prices to the point where they are losing out on properties. While getting a home at a great price is a worthwhile endeavor, it’s important to understand the impact of interest rates.
One thing home-shoppers don’t seem to grasp is that when you buy a home you don’t pay the agreed upon sales price for the home. You pay the purchase price plus the interest on the loan. So take this into account when going through your negotiations. We are currently in a volatile interest rate environment, and they are trending upward. While you’re trying to negotiate an extra $5,000 (or whatever arbitrary number) off the price of a home, is it worth the risk of losing out on the deal entirely? This is a real question you have to ask yourself. The market for properties on the higher side of the conventional conforming price range ($300-450K) is starting to stabilize here in Dallas-Fort Worth, but it’s still a strong market for sellers. How long have you been looking for a home? How long is it going to take you to find another home if you don’t secure this one? What will interest rates be when that happens?
Let’s talk numbers so you can really get an idea of what the difference is. Suppose you’ve found a home listed for $300,000. You’ve offered $290,000 but the seller doesn’t seem willing to budge. When you got pre-qualified for the loan, the rate you qualified for was 5.500%. You intend to put 20% down on the property and finance it over 30 years. If the seller were to accept your offer at $290,000 you would have a loan for $232,000 and your payment would be $1,317 per month (not including property taxes and insurance). If you paid their asking price you would finance $240,000 and your payment would be $1,362 per month. So the difference between the two is a mere $45 a month. Now let’s say you decide this $45 a month is reason enough to walk away from this property. A couple months pass by and you find a similar property listed for the same price ($300,000) and you make the same offer of $290,000. Only this time the seller accepts your offer. But when you talk to your lender, she tells you that rates have increased and you’ll now be looking at 5.875% to finance your home. That means your new loan for $232,000 financed at 5.875% over 30 years will carry a monthly payment of $1,372. The end result is you bought a home for the purchase price you were looking for, but your payment is $10 higher than it would have been had you paid asking price for the first property.
Interest rate is far more important than the actual price of the property. It doesn’t take much of a hike in the rates to make a considerable difference in what your monthly payment will be. Couple that with our current environment in the financial markets. The stock market despite some recent losses, is still performing strong. This tends to increase the rate of return needed to sell bonds. Which means banks have to charge higher interest rates so investors can get higher returns on mortgage backed securities (MBS). Not to mention the Federal Reserve is looking to lower the amount of MBS on their balance sheets, which lowers the demand for them. This too will have an upward impact on the rate of return investors need to lure them away from the stock market and into the bond markets. Home-shoppers should have a sense of urgency while looking to buy a home. Rates fluctuate daily, and if you wait too long you could get priced out of your dream home in a hurry.
