When younger people begin putting down roots, decisions about leasing or buying homes becomes important. Prevailing interest rates can strongly influence these decisions. As interest rates rise, the cost of borrowing increases, sometimes recommending that you rent. The longer the term of the loan, for example,a a 30-year mortgage, the more influential the interest rate becomes. The true cost of each choice includes the tax benefits or detriments involved with either option. Talk to a tax adviser to get useful advice for rent versus home buying decisions.
Interest rates form the single most important component of buy or lease decisions. Consider this example. You buy a home worth $200,000, with a $150,000 30-year, fixed rate mortgage. At a 5 percent interest rate, your monthly payment, including mortgage insurance and taxes, would be $1,013.57. You'd pay $139, 883.68 in interest over the loan term. A rate increase to 6 percent, results in a monthly payment of $1,107.66, an increase of $94.09 each month. Total interest rises to $173,757.28, an increase of $33,873.60 out of your pocket over the loan term. Even smaller rate increases, e.g., one-half of 1 percent, may influence your lease or buy decision.
Be aware that interest rates also influence lease and rent costs. Landlords with adjustable rate mortgages endure changes in monthly payments at adjustment dates, most commonly every 6 or 12 months, as interest rates move up or down. The cost of money combines with the supply and demand for rental properties to drive up, or influence down, the cost of leasing or renting homes, apartments and condominiums.
Home Values and Interest Rates
Minor increases or decreases -- one-eighth to one-half of 1 percent --seldom influence changes in home values, according to Marc Roth, founder and President of Home Warranty of America. There is great debate about longer-term, more dramatic interest rate increases. However, more dramatic rate increases sometimes drive up home values, in the short-term, if inflation increases. Economics dictate that increasing interest rates and home values should react, however, according to Daniel Indiviglio, real estate expert and Washington, D.C. columnist for Reuters, this is not historically true. Still, when rates rise strongly, fewer borrowers are in the market, sometimes forcing sellers to reduce home prices in order to sell properties.
'Hot' Versus 'Cold' Real Estate Markets
Whether the real estate market is booming or crashing, interest rates are normally unaffected. However, the strength of the economy, inflation factors and supply or demand for money pushes interest rates up or down, helping to influence the warmth or coolness of the home market. For example, in the early 1980s, mortgage interest rates skyrocketed to around 18 percent. With many borrowers unable to qualify for mortgages, home values mattered little. Millions of prospective homeowners turned to leasing residences, as they had no other options. Yet, lease prices did not increase dramatically, as many home sellers, unable to find buyers, rented their properties to generate some cash flow, at least.
Credit and Interest Rates
The quality of your credit score influences the interest rate you receive. A poor credit score may also influence your ability to lease or rent a home, if the landlord has minimum standards for credit scores. Prior to the real estate crash of 2007, almost everyone qualified for a mortgage, although often at higher than market interest rates. Since the recession, however, most of those options have disappeared. Most lenders will reject mortgage applications for unacceptable credit scores instead of approving with higher rates.
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