Let’s consider a borrower’s ability to qualify at today’s interest rates versus the benefit of an anticipated price reduction.
Interest rates are still very attractive… between 4.5 & 4.875 percent for a 30 year fixed. If a borrower qualifies for a $200,000 loan at these rates, but is waiting in anticipation that home prices will go down further, they should consider the following… a 1.0 percent increase in interest rates equates to a 17 percent reduction in buying power.
In other words, if a borrower qualifies for a $200,000 loan at today’s rates and they wait for a reduction in purchase prices, their buying power could go down by $34,000 if interest rates were to increase by 1.0 percent. If that occurs, the borrower now only qualifies for a $166,000 loan.
So, what about the possible price reduction? Let’s say the borrower can acheive an 8% reduction in the purchase price, therefore the loan amount also goes down by 8%. Now the borrower only needs a loan of $184,000.
That is certainly a good discount… the problem is the borrower needs a loan of $184,000 and only qualifies for $166,000!
With interest rates still very low, this is certainly something worth considering.
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