2% increase in $600,000 loan is only $733 a month
Don’t get me wrong. $733 a month is significant, and getting a mortgage right now at 4% is a very, very smart move. But, if you are looking for a home to purchase in Los Angeles, there is almost no likelihood of prices coming down anytime soon. Therefore locking in today’s prices before they go up even more will still make sense at 5% (extra cost of $376 per month) or even 6%.
How do we come to that conclusion: Rents!! A $600,000 loan assumes about an $750,000 house. The rent on that home in Los Angeles is going to be easily $3500 a month. The mortgage will only be $3597, even at 6%, while you will pay $3221 at 5%. Part of that amount is paying toward principle, and the interest is tax deductible. Thus, even after you add on property tax and insurance, you are still way ahead of the game. Financially, your future gain or lost will be tied entirely to the future value of the home when you sell.
Now if that $750,000 house goes up by 20% again next year, your mortgage and property tax will both go up by 20%, costing you somewhere around $800 a month if interest rates stay the same. You see, the real potential savings in on buying right, not so much on the difference of a an 1/8th of a point or so on your mortgage interest rate.
Why am I so certain that prices will continue higher? Because of the huge shortage in available living space, especially prime locations. This has put enormous pressures on rents. As rents go up, prices of the underlying units will go up, too.
For several years you have heard that interest rates are headed higher, and there are certainly fundamental reasons to believe that they will eventually go higher. But today the International Monetary Fund weighed in on US interest rates, and admonished the US to keep rates low until at least 2016, as the US economy was downgraded in their latest report.
Call today if you would like to find out how much of a mortgage you are likely to qualify for. If you have credit score issues or are self employed, we can help smooth the path.
Bill Rayman Home Mortgage
12121 Wilshire Blvd
LA CA 90025