The affect a raise in interest rates has on the cost of a home

Mark Twain said, "don't wait to buy real estate, buy real estate and wait". Real estate will continue to be a great long term investment when purchased correctly. The root of the problem we are facing today is the exotic mortgages that allowed borrowers to leverage more than they could afford. As people leveraged more and more prices increased higher and higher doubling and even tripling in a 7 year time frame in many areas of the country. The rapid, unsustainable increase in prices as a result of increased leverage is a major factor in the issues we're facing today. However, interest rates are still historically low and although, in my opinion, we are not at the bottom of the market, I also do not believe that the fed can keep interest rates this low indefinitely without major inflation. One factor in the cost of a home that some people overlook is the cost of the money. Let me explain, a home purchased for $1,000,000 with 10% would leave a loan balance of $900,000. $900,000 at 5.5% will cost approximately $893,600 over the life of the loan while at 6.5% will cost $1,147,885. This demonstrates important points. First, negotiating for a good loan is just as important and negotiating for the right price on a home, sometimes more important as seen in this example 1% of interest made over $250,000 in difference over the life of the loan. Second, when rates rise when they eventually will, even if they only rise one percent, when putting 10% down the loan will cost over $200,000 and nearly 20% more. Many smart investors and buyers that do not believe that the housing market will drop more than another 20% are watching rates, getting approved, shopping lenders and prepared for the right opportunity, and getting 30 year fixed, fully amortized loans.