Here's an email I recently received from a reader:
I have been a long-time renter, but now married with 2 small kids I’m considering buying my first home. I’ve done some research and talked to some banks, but the thing that’s making me hesitate is that I’m worried that houses are overpriced because of the current low interest rates.
The way I’ve approached the home buying process, and the way I think most people do, is to see what kind of mortgage I qualify for, and then use that to figure out what kind of house I can buy. Currently I qualify for about a $500K mortgage at a 4.25% interest rate. However, if the rate goes up to 6.25%, which is still very low by historical standards, I’d only qualify for about a $400K mortgage, which would mean that the prices of the houses that I could buy would decrease by 20%.
If this is the approach that most home buyers use, if rates went up to 6.25% home prices would fall 20% as everyone would only get a mortgage that’s 20% smaller. I know that if incomes rise along with the interest rates that wouldn’t necessarily happen, but I’m not optimistic that incomes will rise that quickly.
I really haven’t had much experience with this, so I’d appreciate you could point out any faults in my thinking.
What are your thoughts for him?