Don't Buy a House
People think low interest rates are great if you're buying a house. Let's consider the negatives.
People can afford a certain monthly payment on housing. There are some exceptions, such as when more affluent people are moving to an area, or when people become willing to spend more money on housing, but in general if you can afford a thousand a month, you can afford a thousand a month, regardless of the interst rate.
Let's say you can afford $2100 per month (this would be 30% of your income if your family income were $84,000 per year). Given you want a 30-year loan, here is how much money you could finance with that amount under different mortgage interest rates:
4%: $440,000
6%: $350,000
8%: $287,000
10%: $239,500
12%: $204,000
This means if you buy a house now, with around a 6% interest rate, you're taking a HUGE risk, considering that when the interest rate rises, people will find it much harder to afford your house.
For the young, or those with short memories, according to the Federal Reserve, mortgage interest rates were up around 10-16% in the 80s. They will be again some day.
posted by Foucher at 9:47 PM
4 Comments:
how many people read this thing anyway?
the negative has a certain unarguable tautological feel to it, but consider the reality of the high interest rates.
the reason rates were so high in the early 80s were because inflation was running equally high. so you wouldn't have lost a lot on your property (if any at all)
of course, the next time rates will go up is because the government needs to borrow more and more to pay for war and social security. foreigners won't want to lend us money anymore and the government will have to offer higher rates on bonds. not sure if inflation will result or not but as our currency becomes less valuable, foreigners will probably see american property as a great deal. seattle real estate is already a deal compared to most of the developed world
(try london, tokyo, sydney, san francisco, manhattan) and a lot of the developing world (shanghai, beijing, ...)
that and our population is set to increase by over 35% by 2050.
This comment has been removed by a blog administrator.
(Posted this once with a spelling error.)
If inflation causes the rise in interest rates, then if you had bought a house at a low interest rate, the dollar value of your house would still take a huge dive by my assumptions (which may not apply in any given situation). The dive would be way worse, initially, than inflation would help. If inflation lasted a long time, you would eventually recoup the loss, but in the 80s it did not last a long time and was not more than 4.6% from 1982 to 1989. In that same period the average 30-year mortgage interest rate was over 10% the entire time.
Hope you like your house.
Hey, I posted a similar article about buying a home here
Why some people are willing to take such a huge financial risk is beyond me.
Anyway, I really only came by to say Happy Birthday.
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