Will it cost more to buy a home even with prices down?

Modifications are being proposed for the mortgage process… The potential impact to the cost of financing a home means that the cost of buying a home may increase even if prices continue to soften.

The total cost of a home

…is determined by two factors:

  • the price of the property
  • the expense of financing the purchase (assuming you are not paying all cash)

We all know that home prices are continuing to soften. However, even if prices are predicted to soften further, the COST of the home may rise because of increased expenses in financing. And these expenses could increase rather dramatically.

Interest Rates

While interest rates have remained at historic lows, as the economy improves, there will be less need for the government to keep rates low. Plus the price increases in commodities… read food and gas, is putting upward pressure on inflation. To counter this, many are predicting interest rates will increase from 1/2 point to 3/4 of a point before the end of the year.

And, due to new mortgage standards, we may also see an additional increase in rates for ’loans deemed ‘less qualified’.

New Mortgage Standards

The government has proposed a new definition for a ‘qualified residential mortgage,’ or what’s called the QRM. The new standard would set a bar much higher than we have today. Anyone not meeting these requirements would not be eligible for the ‘best’ rates available.

And what could be the difference in interest rate for those ‘less qualified’? In a white paper recently released by a group that included the Center for Responsible Lending and the National Association of Realtors:

Some private estimates have concluded that 5 percent risk retention could result in a three-percentage point rise in interest rates for loans funded through securitization. In other words, today’s 5 percent market would become an 8 percent interest-rate market.

Even if the rates for these loans are only one percentage point higher than the best rate, the additional cost to a buyer could be dramatic.

Impact of Interest Rates on Mortgage Payment

The interest rate you receive obviously plays a big role in determining your monthly mortgage payment. How big a role? The chart shows how your payment is impacted even if home prices fall..

The Bottom Line…

You may have delayed your home purchase decision because of concern over where PRICES may be headed.  To make the best financial decision for you and your family, also take into consideration where the overall COST of the purchase may be headed.

For Buyers: waiting can be expensive, or worse. You might not even get a loan.

For Sellers: more expensive loans and less buyers who qualify, will force you to lower your prices even further.

From KCM Blog, April 20, 2011; for more information about the new mortgage rules see KCM Blog, April 21, 2011, 5 Reasons to Hurry and Get Your FHA Mortgage.


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