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Higher rate versus price dip

By Marcie Geffner · Bankrate.com
Friday, April 8, 2011
Posted: 11 am ET

Mortgage interest rates rose again this week in Bankrate's weekly survey, creating a dilemma for homebuyers: Act now to avoid the risk that rates might rise further or wait and hope that prices will drop more.

Either way, it's not an easy choice.

Mortgage and realty brokers tend to emphasize the risk of rates rising. That's self-interested, of course, since the fear of higher rates is a strong motivation for buyers to act in a way that generates income for the broker. No one gets paid while buyers sit on the proverbial fence and watch the housing market from their comfortable perch.

The advantages of a lower price shouldn't be discounted. A lower price means a bigger equity cushion, holding the down payment constant, and a lower property tax basis.

Still, the risks are real, since a higher rate can wipe out the advantages of a lower price, at least in terms of the monthly payment, which is most buyers' main focus.

Meanwhile, rates remain low compared with historical highs and averages. And while conventional wisdom repeatedly says that rates are bound to go up and that rates rise quickly and fall slowly, such sayings so far have proved unreliable in the current cycle.

And that's not all.

Homeowners who want to sell their current residence and buy another one also may need to factor in the effect of a rate adjustment or reset on their existing mortgage.

Renters who want to buy need to consider when their lease ends and how tight the local rental market is. Absent rent controls, a house payment can look more or less appealing relative to the outlook for rent increases.

The bottom line, however, is that plenty of homebuyers are oblivious to or elect to ignore all of these risk factors, since lifestyle changes often dictate the timing of a home purchase. A marriage, divorce, pregnancy, death or job transfer can outweigh all the other considerations combined.

So, what's your strategy? Buy now or wait and see?

Follow me on Twitter: @marciegeff

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2 Comments
Mcferren
April 12, 2011 at 4:53 am

Borrowers can use current Connecticut mortgage rates to lock into affordable monthly payments for mortgage loan.