Clients often ask if now is the time to buy a home. Some want to buy, but would like to save a bit more for a down payment.

Others want to wait until the market hits bottom. (Sorry, you missed that in most neighborhoods!)

In both cases, they are missing the major reason to buy right now – interest rates.

Nothing affects a home’s affordability more than interest rates. After all, we live with the monthly payment, not the amount of the loan.

Look at the chart below depicting the monthly payments for 30 year loans of $400,000 and $750,000.

As you can see, just a 1% change in the interest rate can have a drastic effect on the monthly payment.

Now let’s look at it another way. Suppose we have two clients. One can afford a monthly payment of $2000. The other can afford a monthly payment of $5000.

Look at how the change in interest rates affects the size of the 30 year loan they can afford, and in return, the size of the home they can buy.

As you can see, the higher the interest rate, the less house a buyer can afford.

Finally, assuming a buyer has enough for a minimal down payment, does adding an extra $20,000 to the down payment help much with the monthly payment. Not really, at an interest rate of 4%, each additional $10,000 in a loan will make the monthly payment rise by about $48. That’s it. If the trade off for saving for a larger down payment is that interest rates rise in the mean time, waiting probably is not worth it.

A better strategy may be to go ahead and lock in the low interest rate by buying now, perhaps with a 80-10-10 mortgage (we can explain that), and look to pay off the “10” mortgage with the funds that otherwise would have been saved for a larger down payment.