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The Effect of Excessive Mortgage interest Rates and Looming inflation on Home Values

By: Will Daly

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Fiscal forces will in a little while shape home valuations in United States real estate markets; rising interest rates and/or inflation.

So two additional reasons not to acquire homes right? Just the contrary for the following reasons.

Interest Rates - If you buy real estate today and get a mortgage with a 5% interest rate then you are enjoying darn near the best interest rates in history. You gotta know, these are wonderful rates. And in the even mortgage interest rates increase, your interest rate remains the same So, In the even rates go up to 8%, 9%, 10% or greater (keep in mind interest rates were 12.75% in 1984) you'll be smiling huge.

Furthermore, let's say you have a certain amount to spend monthly on a mortgage payment. If you buy today and lock in the favorable rates then less of your monthly payment will apply toward loan and a greater amount of your monthly payment goes toward the real property itself. Get more property and less mortgage.

Inflation - If we experience double digit inflation (10% or greater) US home buyers will wish they had taken advantage of our current high rise condominium prices rather than waiting any longer.

With inflation, the value of a dollar goes down. With ten percent inflation the cost of a $1 loaf of bread will go up ten percent (ten cents) and the cost of a $250,000 property will jump ten percent ($25,000). The value of the bread and the property go up because the value of the dollar will be worth ten percent less. So, during inflationary days, while your dollars go down in value, real property and many products (food, {fuel|petroleum|oil|coal|, interest rates, gold, etc...) cost more. With realty, the value of your money is "protected" but with cash the value of your money is gone.

Plus, The Force of Leverage - Leverage is a financial term for buying a piece of property using a relatively small amount of cash and financing the rest of the purchase price. In our example above, say you used $50,000 cash for the down payment and borrowed the remaining $200,000. Presuming inflation is ten percent per year then the $250,000 real property will be worth $275,000 in a year. So with $50,000 cash down payment you gain $25,000 or fifty percent in just a year. Don't forget that those who do not have their money in assets like real estate will actually lose ten percent of buying power for the period of that same period.!!

EXTRA BONUS - Paying Back With "Weaker" Money - In conclusion, if the worth of the dollar is less as a cause of inflation AND you have a fixed rate loan, then you are paying the bank back with "cheaper" money. As we recognized previously, it could cost a buck to buy a loaf of bread today but during ten percent inflation that same loaf will cost $1.10 because the dollar is not as strong as it was a year previously. So, when you make a interest payment during ten percent inflation, those dollars are worth 10% less than they were a year before.

Who knows if mortgage interest rates will rise or if we will undergo high inflation. Yet, with mortgage rates being so low, then one would think they will increase. Remember, interest rates in the early 1980's were in the very high teens, yeah like 18%!!! Gang, if you can borrow these days at 5.25% or lower then take advantage of it! If we do experience inflation then you'll be very pleased you bought sooner rather than later. The amount of homes and condos closing in Phoenix and surrounding cities are way up, prices seem to have stabilized, there are still important tax credits for most buyers, there are still tax benefits for property owners and IF mortgage interest rates and/or inflation occur, folks who buy now will be delighted they did.

I'm not one of those overly optimistic realtors as I have written numerous blog posts about the challenges in the real estate market Yet, I do believe in the fundamentals of economics and when the market starts “making sense” I am not afraid to discuss that also. Real estate is beginning to make sense again and the agents at We Know Urban Realty can walk you through it

Article Source: http://depositarticles.com/

The real estate agents of We Know Urban Realty LLC specialize in the sales and marketing of high rise condominiums, brownstones, loft condos and row houses in Phoenix, Scottsdale and Tempe. Will Daly has specialized in the Phoenix High Rise Condo market for over thirteen years.

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