Author Topic: Question on "Historically Low Interest Rates" and effect on a home purchase.  (Read 3635 times)

onemorebike

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Per some other posts of mine, I'm looking at a new home (and selling and old home) as we move to Minneapolis. We have enough money coming out of these houses to do one of two things:

1) Buy a $100,000 fixer-upper, put some sweat equity (and some cash) into making it more lovable/livable. This may mean buying a smaller or stranger house that we would probably move from as the girls hit their teenage years and then either renting it out and buying another or selling it all together to cash out some of the equity. (8 years or so) - it is worth noting, we might do this with ANY house!!

or

2) Buy a $230,000 (ish) house that is livable/lovable until the girls are out of highschool and stay in one spot.

The former allows more flexibility now, in terms of our finances and our lifestyle, to work the kind of hours we want in the kind of jobs we want and have some FU money always at hand. The latter would be locking in at "historically low interest rates" (although the U.S. hasn't been much above 8 percent since 2000, my calculations show on a $225,000 house it could mean a difference of as much as $500 a month in mortgage if we bought the same priced home at 8% in 8 years) in a more expensive home that might limit us more financially but would have us paying a 30 year at 3.75% (ish).

If you were in our situation, what would you do and why?

Cheddar Stacker

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#1 if it were 100% my choice, if my wife chose it would be #2 without a doubt.

I've had similar thoughts, something like "I should move now so I can lock in a low rate for 30 years." I've ultimately talked myself out of it each time and I think it's the right choice. Thinking that way can lead to you buying too much house, or too nice of a house.

Also, I'm curious why it's a foregone conclusion that you wouldn't stay in the smaller/stranger fixed up house for more than 8 years. When the girls are teenagers they won't want to be in the house anyway.

Reducing your housing cost by $100K allows for so much more money to invest. Earning 7% is better than saving 1-2% (today's mortgage rates vs. tomorrow's mortgage rates).

shotgunwilly

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I struggle with this also.

It may be worth noting that, yes, interest rates could go up to 8%, but then again that $230k house might be selling for $180k when that happens. Who knows???

Bob W

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The "Historically Low Interest Rates"  is a marketing ploy and inaccurate. 

http://images.dailywealth.com/images/mortgage%20rates.png

Rates have trended down since 1982.   Prior to 1970, for decades, 4% was not out of the norm.  Prior to the creation of the FED the US enjoyed rates in the 1-4% range for 150 years.   (the fed prints money and creates inflation,  that is why rates must be high enough to overcome the printing of money)

My guess is since the FED is upside down now they can't let rates go over 5-5.5% otherwise they will technically be insolvent.   So they will do whatever needed to keep rates in the low range for decades. IMHO and I could always be wrong, but look at the chart, I don't think I am.

We are very early in a diluted expansion cycle with most of the world still in a deep recession.  The world needs the money tap of the FED to keep pumping. 

Bottom line -- I would make the decision based on what you want and your goals and not worry about a potential rise in interest rates. 

aspiringnomad

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[snip]
« Last Edit: August 24, 2015, 08:36:25 PM by dcmustachio »

JustTrying

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I'd say that this is a matter of preference. At first I thought you were crazy, "A house for under $100,000???" (I'm originally from Mpls, and this sounded wacky). But then I check zillow, and sure enough, there are homes for $100,000. I've got to admit, it would be hard for me to turn down a $100,000 home, but mostly because homes for that price would be unheard of where I live now. It it were me, I'd go for the $100,000 home! That being said, I don't know if you are truly talking about Minneapolis, or if you're talking about suburbs. But if you're moving to Minneapolis proper, stay in south Minneapolis (where the $100,000 homes are harder to find). I had so many friends boldly move to North Minneapolis and then get mugged or have other similarly scary experiences.

TerriM

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Not to assume that you're rolling in cash, but if houses are really $100K, why not buy a nice $230K to live in, and then put $10K down on a $100K house and fix it up for a rental at the same time.

frugaliknowit

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Current interest rates should have no effect on your decision.  There are lots of moving parts to the housing market.  Right now, for example, rates are super low, but employment in many markets sux.

If you are going to buy a fixer upper, you need to make sure that the cost of the fixing up is justified by the price.  You need to take into account the value of your time now and in the future.  Do you work a lot of hours?  Might you in the future?  There's nothing worse than a "half baked" re-hab that never ends.


Rural

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Current interest rates should have no effect on your decision.  There are lots of moving parts to the housing market.  Right now, for example, rates are super low, but employment in many markets sux.

If you are going to buy a fixer upper, you need to make sure that the cost of the fixing up is justified by the price.  You need to take into account the value of your time now and in the future.  Do you work a lot of hours?  Might you in the future?  There's nothing worse than a "half baked" re-hab that never ends.


...Said the person who clearly is not living in a half-finished new build. :-) Wouldn't trade it for anything, though.

Seņora Savings

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I would get the minimum amount of house that will currently satisfy your needs.  I doubt that locking in a low interest rate would save you more money than you'd spend on property taxes, maintenance of more space, heating, buying crap to fill it up, etc. 

I think that you've created a false binary or buying a cheap fixer-upper and buying as much house as you can ever imagine needing.  Either you want to do repairs and should be comparing giant run down houses with small run down houses or you don't, in which case compare modest well kept houses with large well kept houses.