- The Washington Times - Thursday, December 8, 2005

With all the talk of softening markets, many buyers have moved to the sidelines hoping to wait out high prices, believing that lower prices will help them achieve their ownership goal or to move up into the house they really want.

Instead of watching prices, buyers should really keep their eyes on interest rates, the most powerful component of the home-buying process.

If you wait for prices to level and drop while interest rates increase, that now-affordable home may move out of reach.

A national mortgage company recently issued a study comparing buying power on a household annual income of $100,000 to demonstrate this point. It was quite telling.

If interest rates increase as the Mortgage Bankers Association of America forecasts, payments won’t come down with the lower prices. MBAA is predicting 6.7 percent rates into next year.

At that amount, a buyer with an annual income of $100,000 will be able to qualify for a mortgage of about $400,000. The average home in the Washington area sold in the past year for about $450,000, according to a November Urban Institute report commissioned by the Fannie Mae Foundation.

Last June, that same borrower could have borrowed $450,000 at 5.63 percent on a 30-year fixed mortgage.

When it comes to buying power, the most volatile variable is the interest rate.

Here are the details: The 30-year fixed rate mortgage for $450,000 at 5.63 percent would cost a borrower $2,591.87 per month. When interest rates rise to 6.7 percent, that same $2,591.87 will only fund a mortgage of $401,667.91.

Let’s say it’s a loan for a $60,000 household budget, instead of $100,000. The purchasing power for this buyer would be roughly $1,550 per month. That’s a loan for $217,024 at 5.63 percent, including $300 for taxes and insurance. That same money at 6.7 percent will only purchase $193,715 — a difference of $23,309.

So here’s some advice. Those who are thinking about buying should look over all the options and run their personal numbers.

How long can you wait for prices to come down while interest rates march upward before you’re priced out of your favorite home again? If housing inventory is on the rise in your market area, move sooner rather than later. Smart sellers are now willing to negotiate. You may be able to get that lower price just by asking for it.

Case in point: Just a couple weeks ago, a Realtor told me how he saved his buyers some $75,000 from Washington-area sellers who realized they needed to get going instead of hanging on to their price.

Make an offer. The worst that can happen is the seller will counter your offer or reject it. The adage is true: Nothing ventured, nothing gained.

Second, if you know you’re going to buy, lock in early and move in on the contract. By locking in, you save money by having a lower rate for your mortgage. Some mortgage programs let you lock in for up to 120 days.

Average interest rates have risen by more than half a percentage point in the last six months, from 5.62 percent to 6.28 percent, according to Mortgage-x.com’s rate calendar for the first week of December.

Even a one-month delay in locking in your rate could make a difference of several hundred dollars on your monthly payment.

• M. Anthony Carr has written about real estate since 1989. Questions and comments can be posted at his Web log (https://commonsenserealestate.blogspot.com).

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