Which is better in the long run: High purchase price/low interest or lower purchase price/high interest (6%, negotiating)

[ocnymonty]

My wife and I purchased our very first home last January. We're extremely happy with our house and for us we bought right at the right time (we needed a home that we could afford and also accomodate an in-law). If we had to we could live here 20-30 years. No regrets really... however as we see housing values fall around us I can't help but think, what if we waited.

We budgeted ourselves based on less than we qualified for however like many New Yorkers we're still pretty dependent on 2 incomes to pay our mortgage. Because we were buying a home to also accomodate my mother-in-law we bought a little larger than the average starter. No regrets at all... we have a lovely home, in the town we wanted for a fair price. What we purchased was a great two family home; an older home with lots of upgrades, plenty of living space that was in move in condition. Because the house is older (70 years old next year) it also has very low taxes (almost half of the average taxes in the area), which was a deciding factor in this purchase. At the time of purchase starter homes were in the $260-$300k range and most were small, and needed lots of work. Most medium sized homes (1500-2200 sq feet)were averaging $325-$400K. The house we purchased was originally listed at $380... a few weeks before we made our offer it slid to $360. After some hard negotiating we purchased at $330K w/ a 6% concession. We put 5% down and we financed FHA $335K at 6% APR. At the time... I don't think we could've done any better. Or could we have IF we waited.

Again no buyers remorse at all, but I wonder what our financing picture would have been like if we waited until next spring. The comps we were basing on have already slid 8%, 10%, 12%. In fact a house on the corner listed at $344K at the time of our purchase is recently re-listed at $289K. I know the prices with rebound (we live 65 miles north of NYC) however I think to myself was Janurary really the best time to buy. Should we have waited?

The one factor of my purchase that makes me smile is my interest rate. 5.85% 30 yr fixed. Admittedly we had so-so credit (mid 600's scores). I have a feeling if we had waited until now, maybe we would've been approved at 7% or even 8%. The sellers had bought this house in 1989 for $122K but their interest rate at the time was 11%. So my question is... is it better to buy a house at a lower list price and have the house build more equity but pay a higher interest rate or a higher list with a lower interest. Which will build you equity faster?

[sonarrat]

Definitely, the lower price and higher interest rate, because mortgage interest is tax deductible and you can always refinance to a lower rate if they go down a few points. Or, when interest rates are extremely high, you can do like my parents did and get a six-month ARM. They just reset to 5.85% and didn't have to pay refi fees.

[mayfair]

I agree with pp- higher rates and lower price. You can always pay a lower-priced house off early if you get a raise, cut expenses or come into some money. With an an expensive house, you're stuck with that expense.

[mojo_1979]

The previous posters are indeed correct. Higher interest rates result in lower sales prices because homes are purchased, in general, based on the monthly payment.

If you buy when interest rates are high, you can always refinance when they go down. Or, if interest are really high, then you can get an ARM. That is when an ARM is a good thing, when you expect rates to go lower. For some reason, a bunch of people got ARM's the past few years when interest rates were at historic lows with nowhere to go but up... I still cannot understand what they were thinking...

[Delron]

Well, your question depends upon how quickly you can pay off the loan/how much you will spend in interest (minus the benefit of the interest tax deduction).

Personally, I would much rather get a lower purchase price with higher interest, because I have the cash to either make the purchase in cash outright, or the earning power to pay the loan off quickly.

I didn't read your full story, but I'm guessing you're wondering whether to buy now, while prices continue to drop and rates are relatively low, or wait a year or two when we will almost assuredly be further down but interest rates will again almost assuredly be higher?

[Silverfall]

If you plan to live in a home more than 5 years, it is "in a number crunching way" better to pay down points in interest and pay more for the house, than it is to take a price cut and pay a higher interest rate.

This is a different scenario due to the extensive nature of the price drop.

You purchased you home for $335 with a 5.85% interest rate.

Your total interest over 30 years will be $376,471.60 which means that you really will pay $711,471.60 for the home.

If you waited and purchased the home for $289,000 with a 7% interest rate, then you will have paid $403,182.80 in interest for a total cost of the home at $692,182.80.

You would have saved $19,289 with the second scenario, over 30 years.

[chet everett]

Your question is not really framed correctly. It is not about building more equity when you have a lower price. You can use the use any online amortization calculator to prove to yourself that the percentage of your payment that decreases the principle owed is approximately the same as the loan is paid off -- that is the way all 30 yr fixed mortgages are set up.

What really matters is a more complex question about "at what point MIGHT it make sense to accept a bit higher interest
rate for a substantially cut in price". I don't know offhand which online calculator is best to do this, but I would suggest the easiest way to go about this MIGHT be to use a calculator that lets you "lock in" your current TOTAL P&I amount and then BACK CALCULATE the various borrowed amounts and interest rates. If you are any good with a spreadsheet like Excel you can just plug away: Using your Spreadsheet to calculate mortgages

Perhaps a better way to really think about this NOT to look backward but to consider what you can do in the future to make the total amount you pay out in mortgage cost less. You have the option to send extra payments to reduce your principle. This will hasten your loan pay off -- the quicker your loan in paid of the less total intrest you pay. Pretty basic by itself, but coupled with the fact for two given loans with the SAME amount amount borrowed the one with a higher interest rate is MUCH more expensive over the long haul it should be clear that by increasing the "extra payment" by a given percentage of the borrowed amount you effectively "increase" the savings in interest paid AND shorten the period to repay the loan.

Here are some easy examples, Assume the amount borrowed is $200K, the loan is started on 01/07 and in all cases I put an extra $200/month toward principle:

at 6%
Original Payoff Date:: 12/2036 New Payoff Date:: 9/2028 Interest Saved:: 71,062.88
at 8%
Original Payoff Date:: 12/2036 New Payoff Date:: 1/2028 Interest Saved:: 110,991.38
at 9%
Original Payoff Date:: 1/2037 New Payoff Date:: 8/2027 Interest Saved:: 134,630.95
In every case the same extra $200 shortens the LENGTH and the total 'spend'. The savings in interest are more dramatic the higher the rate is and the length SHORTENS more, and that is how amortization schedules are built.

While I like Silverfall's analysis, I don't think it is the best way to look at this. In the first example your Monthly Mortgage Payment: $1,976.30
In the second Monthly Mortgage Payment: $1,922.72So right out of the gate your payment is $53.58 SMALLER.

I don't know what good can come out of "looking backwards" and saying that the house that you are currently in and stated is perfect for your situation MIGHT have fallen in price...

[tamitrail]

You've stated a few times thing such as "no regrets" or "no remorse" yet to me it sounds like you think you could have done better. Should've, would've, could've. It's all water under the bridge now. There is no way to predict if you could have done better. You don't know if the house you wanted would be available at all if you waited. You don't know if the list price would have been lower. You don't know if the interest rate would have been higher. You only know what you have now and you've painted a pretty rosey picture of how ideal it is for you. Stop living in the what if's and enjoy your home!

[SoCal Bottom Rider]

To the original poster, the deed is done. Too late. Enjoy your home! As long as you can afford the payments, dont torture yourself with 'what ifs'.

BTW..I would prefer to buy a same home with a 7.5 rate for 280k next year then buy now the same home for 390k at 6 percent. A rate can always be refinanced but overpaying for a home is permanent.

[scuba steve]

Higher rate, lower cost because it'll be better for the property taxes which can get a little steep in some parts of the country.