Updated: Feb 21
Hi! Hello! Welcome to Michaela’s school of Real Estate. Here we explain news articles that only speak in terms of the entire country as a whole but don’t actually apply to Chicago, misunderstood meme’s everyone is sharing, and tips on how to be smarter than your neighbor who claims to know everything about real estate.(FYI - If your neighbor is a realtor and you are not, they may actually know more than you about real estate.) This week’s debunking is of a meme that got a lot of attention on social media this past week. Basic scenario that isn’t possible but worth exploring for the simplicity of math. Say the list price of a property is $500,000. You are receiving a 30-yearfixed rate mortgage with zero $ down, free property taxes and no HOA fees. Paying a 7% rate on $470,000 = $3,127 Paying a 2.99%rate on $600,000= $2,526 So why on Earth does the meme say the 7% rate at $470,000 better??(It’s clearly $601 more!) Well for starters, we don’t live in a world where you get to choose your rate like a tasty chicken sandwich from the menu at Chick-fil-A. You don’t get a vast array of options when it comesto your rate. There is no one moment in time where you get to say “I’ll take the 2.99% rate please” when the national average 30 yr. fixed mortgage rate is 7%.
Answer is two fold. First, your investment is at a lower price. When rates are high, demand is lowered, therefore prices are also lowered. This means you purchased at a relatively lowered price than what the market would require for the property in a low interest rate environment. Since you paid a relatively lowered price, that means whatever appreciation you have on the property in the future, has the ability to grow more over time. If you start a race at -10 yards and you need to finish at the 50-yard line, you’ve given yourself the opportunity to run 60 yards. If you start at the 10-yardline, you only have the opportunity to run 40 yards. The number of yards you’ve run in this made-up race
= the amount of money you’re going to make on your property through appreciation.
Secondly, as mentioned above, you cannot change your purchase price; HOWEVER, YOUR RATE CAN BE CHANGED!
It has been widely predicted that interest rates will be high for the next 12-24 months and then begin to plunge downward. Therefore, doesn’t it make sense to buy in today’s “high interest rate market” where purchase prices are more negotiable (because demand is lower), than when rates go down and everyone and their mother (who didn’t read this blog), decide they’ve hit the jackpot and need to buy real estate? (Demand will go up, therefore prices will go up.)
Solution: Buy now, get an excellent purchase price, refinance your 7% rate in 2 years, and rack in the free equity, because of appreciation, when rates go down making value’s skyrocket once again like 2021.
**Disclaimer – ONLY buy now if you can comfortably afford the monthly payment on the property at a 7% interest rate. **