Two housing-market shifts encourage potential homebuyers to call real estate agents. The first is a drop in housing prices and the second is low mortgage rates. Deciding which factor is more important can make a difference in several areas, the most important may be in your wallet.
Impact on Monthly Payment
Suppose you started the home search process when interest rates were hypothetically 6%. You saw a one-bedroom luxury apartment for sale for kes 10,000,000. You calculated your 30-year monthly mortgage payment on kes 8,000,000 – the amount you would be mortgaging after a 20% down payment and your closing costs. Your monthly payment would be kes 48,000.
You decide you don’t like this payment and rate, so you wait six months and the interest rate drops to 4%. However, an apartment in the neighbourhood you want now costs kes 12,000,000. You put down 20% plus closing costs, and you are left with a mortgage of kes 9,600,000. Your monthly payment on a 30-year mortgage is kes 45,800. Your payment dropped by kes 2,200.
But does a payment drop financially make up for the higher down payment? Factoring in that your down payment was kes 400,000 more, you still save about kes 1,000 to kes 1,100 per month – around kes 392,000 over the course of 30 years.
If real estate prices had not risen in your prospective neighbourhood from the kes 10,000,000 price point with which you started and you had snagged a 4% interest rate, your monthly mortgage payment would have been kes 38,200. You can use Kenya Homes’ mortgage calculator to see what your payments would be.
Impact on Down Payments
In the example of the apartment that rose from kes 10,000,000 to kes 12,000,000, your monthly payment dropped because of a lower interest rate. But would the lower payment help you if you didn’t have an extra kes 400,000 for a larger down payment?
The difference in the down payment could eliminate the possibility of buying the home you want or knocking you out of the buyer’s market altogether if you can’t find a cheaper neighbourhood. Also, losing that extra kes 400,000 will affect your ability to pay for unexpected home repairs, lower the amount of your emergency savings and diminish your ability to afford to furnish your new home.
Coexistent Low Rates and Low Prices
How do you know what a low rate is? For example, in 2016 interest rates and housing prices were both rather low when compared to the previous and following three to five years. Look at the last five years for highs and lows compared to the current situation.
There’s no assurance that history will repeat itself and create other low prices/low rates housing market. According to property market analysts in a 2018 Cytonn report, Kenyan house prices were to rise at double the pace of inflation and wages this year. The supply of single-family homes is falling short of rising demand, making housing less affordable. If you need a house soon, the option to wait for an ideal housing market circumstances may not be realistic.
Impacts on Movability
Interest rates don’t matter as much if you can easily afford your payments and live in your home for five years or less. While it’s never a guarantee that housing prices won’t drop further, you can view estimated housing prices for the last 10 years by selecting an address in the neighbourhood you are studying online.
Always compare neighbourhood values instead of national or city by city. Home price patterns vary greatly from neighbourhood to neighbourhood and state to state. The likelihood that you will owe more than your home is worth (known as being underwater) will be less if you buy a home when your local real estate market is below its peak.
Refinancing
An advantage of buying at a lower home price compared to having a lower interest rate is that your home can be refinanced or modified in the future. If interest rates decrease, you can lower your costs. Basically, the problem with high initial interest rates can be mitigated in the future if rates decrease.
If your current home’s interest rate is significantly higher than current rates, ask potential mortgage bankers how much it would cost to modify your loan. The range can be anywhere from free to thousands. There’s no guarantee that home loan interest rates will drop, but you can make sure that you can afford to refinance if they do.
The Bottom Line
The decision to buy a home should always be based mostly on your ability to afford the monthly payment, down payment, home repairs, and furnishings, while having enough left for an emergency fund. Always consider factors such as closing fees and the option to pay down your mortgage if you must move quickly.
Ideally, buy when both interest rates and home prices are low. If that’s not possible, calculate both short- and long-term costs of a lower interest rate versus a lower purchase price. When the numbers make the most sense, make your move.