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House Prices, Inflation, Early Payments and Interest Rates

Dated: March 27 2023

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This article seems a bit wordy, but it will be easy to understand and worth the read...

Many buyers and sellers are asking me how the market is and how does it affect them? In this weird market supply and demand may not be working right. Normally when there are many homes for sale and not enough buyers, prices have a tendency to go down. Then there are times when there is 1 house for sale and there are 5-10 different bidders (families and investors and at times foreign investors) then the price of the home goes up, up, up!

This up in price is great for the seller they make more but not so good for the buyer. Whether I agree or not, the powers that be say the solution for this “Inflation” and high home prices is to raise interest rates (personally, I think the interest rate rise by itself is NOT the solution as not enough homes are available for all the buyers, this is a SUPPLY problem).

 Nevertheless, I have three charts that are basic calculations that may help people visualize the cost of rising interest rates and the power of early payments or additional principal payments.

The first two charts show an identical loan amount and on a 30 year fixed mortgage. The first one has a 5.75% interest rate and shows the total interest paid and if $50 additional principal payment for only the first 4 months ($200) what the saving will be when the loan is paid.

5.75 Rate with additional Payments

The second chart is exactly the same except with a 6.75% interest rate (a 1% increasse in the rate, raises the payment 11.14%) , just look at the different monthly payment:

 

6.75% rate with extra payments comparison

Also notice that the $200 in early principal payments saves A LOT more!!!

On the third chart I kept the interest rate the same but lowered the loan amount to closely equal the monthly payment the monthly payment amount of the first one with the lower interest rate (the chart above). So, if the solution to the high price of a home is to raise the interest rate the seller would have to drop the price of the home $31,748 from $316,665 to $284,917!

lower loan amt for rate increase

Now keep in mind this is only a 1% rise; but in the last 18 months interest rates went from the low of 2.75% to 6.75%, roughly 4% (approximately). What does a 4% difference in rates mean? A payment that is $761.19 higher or an increase of 58.87% in your monthly payment.

Question is what is worse the seller making and extra 50-100k or the bank/investors making a lot more in interest rates.

Okay one last chart, the original home priced at $316,665 would have to come down $117,349 in price to $199,316 to equal the same monthly payment of early 18 months ago of $1,292.76. I doubt the owner can take that kind of loss of lowering their home 62.94%!

Rate increase of 4$ affects payment

Okay, lets say mortgage rates go back down to 2.5% (crazy I know), we still have one problem… the shortage of homes for sale!

I put this together just so that people can quickly visualize the difference that mortgage rates make and the impact of making extra payments on principal if possible!

Back in 1996 interest rates were 8% all in all not too bad right now.

Your thoughts…

Also check out Homes For Sale in these cities

Chesapeake
Norfolk
Suffolk
Portsmouth
Hampton
Newport News
Virginia Beach

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Carlos Cardo

I have been helping people become home owners, helping home owners sell their homes and it is a great feeling to be a part of that for over 18 years. As a Marine, moving 14 times I experienced the pr....

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