Interest rate or price increase, which costs more?

[Camas Lilly]

I got started in a conversation on another thread, so not wanting to take over the thread, am starting a new one with my question.

Previously I commented:

We are moving to Idaho, which has a slightly higher cost of living. (So is everyone else apparently.) All said and done, we expected to have $60-$140K mortgage. We have the property and the shop is going up as we speak upon availability of materials, delays, delays, delays.

Saving grace right now is I had already priced in a $35,000 price increase, which is right on track as of Feb 2021. I am still working and we haven't yet listed our current home, so the value is moving in tandem with most everything else, maybe except Idaho. Move is on for 2022, no exceptions. Have waited long enough.

We have choices. Order the home now since construction time is 1 year out, sell next Spring and see what we can afford at that point or put most of our things into storage and move into our single wide mobile home on another property in Idaho and wait. We do have some flexibility since we are ordering a modular home. I have already stepped down on the floor plan and options with something I would love just as well, but still expect prices to be high.

I would love to just sell our home and move into the mobile home, saving hoards of cash every month, but also risk the uncertainty of the housing market, stock market, interest rates, etc. etc., not to mention I would no longer have a good piece of real estate appreciating anymore. Will home prices stabilize and come down? Will interest rates hold? Who knows? The scary part is, what if everything keeps escalating past two years from now and we get stuck in the middle? In one sense, bite the bullet makes a lot of sense, but that cash is really calling too, maybe a couple thousand a month.

We previously haven't set plans on the mobile home because of our pets (we need zones), but the way we are going right now, we will be going down on that count soon, so that issue should be resolved by the end of the year.

Best answer I saw on this thread was "Bite the bullet and buy now to lock in a low interest rate." Which comes to my new question:

Which is more expensive, the increase in a basis point in interest rates or $30,000-$50,000 in mortgage cost? Example: If my house price is going from $312,000 to $342,000, I have $185,000 in equity. I have $600 budgeted for a mortgage payment. We apply the equity to the loan and we are good at 3%, $662 monthly payment and probably 3.5%, $705 monthly payment. We also could invest the $185,000 in a total market fund, which I am thinking would offset half of the payment of $1442-$1536.

If I want to stick to my $600/monthly payment, which is going to price us out of the market quicker? Price increases or interest rates? I am thinking interest rate is the obvious answer, but wanted your input. So after doing some figuring, I am also thinking buying a home sooner rather than later is the smart thing to do before interest rates price us out completely.

This will be our last house, so what the property is worth, really isn't a concern. I will be widowed or moving into assisted living when we sell. We are getting the property for a great price and should be already starting out with some equity. I understand housing prices may come down, but interest rates will not. We are headed up there in a week and then won't be back up again until September so, we need to make a decision. Not to mention it will probably take 6 weeks+ to get a loan and get locked in.

Thanks in advance. Hope I have explained well enough.

 

[pjigar]

I personally wouldn't buy a new house if I am not going to live in it for over a year, especially during rising price market. Because of the following reasons:
1. No one can predict the prices or interest rates in the future.
2. I don't want to double my debt regardless of the interest rate, especially when I am planning to stop working in couple of years.
3. The worst case scenario doesn't look good: You have a new debt with good interest but in return you paid higher price for the new home. What if the RE market goes down when you are ready to sell? You get a double whammy.

The best action in such unpredictable times is to do even exchange: Sell your current house and buy a new one at the same time, even if that means renting for few months during a new construction phase. You will be able to lock in the prices on both houses. I think difference in the principal is more important factor than the interest rate this close to the retirement. If you can pull off the even exchange then you got the best of both worlds. Only down side would be that you have to move twice but this may be blessing in disguise to declutter twice.

 

[Camas Lilly]

I sent an e-mail to the lender this morning with some questions. I know they do all the paperwork and approval right up front with the Modular builder, you sign and pay a deposit when you order the home. Not sure if you are locked in on a rate at that time, but if not, what the heck are all these people doing ordering a house not knowing what interest rate they will end up with? If that is the case, maybe there will be a lot of undelivered homes on sale in a year from now.

We wouldn't be doubling our debt, just about $35,000 higher between last October and this February according to the last prices I was able to get. I am going to figure $45,000 price increase from $312,000 to ~$357,000. The option is to apply current equity to the loan balance to meet our budget, or invest the equity and pay half the payment on the full amount with that return.

 

[pjigar]

Make sure you read the contract (fine print) because some of the builders have started to cancel the contracts as old as 6 months and stopped honoring the prices in the contracts. This is simply because the material prices are going through the roof.

 

[Camas Lilly]

Make sure you read the contract (fine print) because some of the builders have started to cancel the contracts as old as 6 months and stopped honoring the prices in the contracts. This is simply because the material prices are going through the roof.

Thanks, I sure will.