Thursday, February 28, 2008

Breaking Even

So I did a quick calculation this morning to make myself feel less anxious. I am no math whiz so take this all with a grain of salt.

I assumed a $350,000 principle and then incremented the interest rate by 1/8 to get a payment schedule. I then took that payment schedule and assumed a fixed rate of 6.5% to get a corresponding principle.

This helped me arrive at a general relationship between interest rates and price drops. With my assumptions, for every 1/8 interest rates rise, you would need a 1.4-1.6% decrease in price to still break even.

To put it in easy to remember terms, for every 1% increase in rates, you need a corresponding 11-12% decrease in price to still break even (the relationship is close to linear, but not quite, for the interest rates I looked at).

Of course I would rather have a lower principle and higher interest rate, for all the reasons pointed out yesterday......but in the end, you still have to come up with the cash each month.

I'm sure there is some elegant interactive calculator for this type of analysis. If anyone knows of one, please let me know the URL so I can post it on the sidebar.

7 comments:

Patient Renter said...

I wouldn't mind seeing a calculator either since this is exactly what I was wondering about yesterday.

Monthly payments being equal though, all other things are not, since a lower purchase price with a higher rate still keeps the door open for a refi whereas a higher price and a lower rate seals your fate. Just one more variable for the mix...

Buying Time said...

Once again, if I had paid more attention in finance class.

I wanted to value this refi potential as an option and included it in with the relationship. But alas, my finance skills are rather pathetic these days.

Any finance geeks out there know if the home price/interest rate relationship is similiar to that of bond pricing?

Buying Time said...

Forgot to also note that the tax deductibility of the interest also favors the lower principle, with higher interest tradeoff.

sacramentia said...

I think the more accurate comparison is how many points it takes to buy the rate down to the payment you'd like vs. the actual dollar amount of the home if you are only considering 30yr fixed.

For every 1% of loan value the rate goes down .25%. (roughly $55/mo on 350k). i.e. NPV of $55/mo for 30yrs = $3500 according to the mortgage market.


Goods news is rates fell today and I think they will continue to fall until we get to 3/18.

AgentBubble said...

sacramentia

I was under the impression 1% bought the loan down 1/8 (.125%) of a percentage point.

Ed said...

AB,

No - that's too much to pay for 1/8th. Go to everbank.com, mortgages, use Sacramento, 400K value, 300K loan, 30 day lock, and I get this:

Rate,Points,APR,Payment,Down
5.250%,3.099%,5.581%,$1656.61,$13112.95
5.375%,2.420%,5.645%,$1679.91,$11075.95
5.500%,1.746%,5.708%,$1703.37,$9053.95
5.625%,1.159%,5.780%,$1726.97,$7292.95
5.750%,0.799%,5.872%,$1750.72,$6212.95
5.875%,0.228%,5.944%,$1774.61,$4499.95

(I am sure blogger will eat the format - sorry!)

These were the various rates without a lender credit at closing (there were more options.) The interesting thing is this: the buy down is NOT linear. However, it isn't 1% either. This table will likely survive better:

Rate Cost
5.250% 0.679%
5.375% 0.674%
5.500% 0.587%
5.625% 0.360%
5.750% 0.571%
5.875% -

For each decrease, that's the percentage of the loan (300K) you'd pay in additional costs. So, in this particular lender's terms, it is right around 0.6% per 1/8th. Another view is that your 1% example would get you a full 1/4th off, with a little change back. :)

Hope this was helpful!

Ed

(I am not recommending or endorsing this lender, but I have used them. I find the quality of information and accuracy of closing costs to be a very fair comparison tool.)

sacramentia said...

I used amerisave.com - should have noted that in the original post.