# Purchase Price or Rate?



## Cal (Jun 17, 2009)

Upon reading an article the other day, I was wondering what our forum members thought was more important in the purchase of RE, the purchase price or the rate terms and conditions?

Me...Purchase price, I feel is the most important, your profit is entirely made upon this. Regardless of how good of a sell price you get.


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## HaroldCrump (Jun 10, 2009)

Purchase price.
That's what's so crazy about the current RE market, esp. in the Greater Toronto Area.
Low interest rates have inflated the prices hugely.
Folks are willing to overpay by $100K+ just because they can get a 5 year mortgage at 3.5%.


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## K-133 (Apr 30, 2010)

From a macro level the better question is; what came first, the interest rate or the price?

My opinion, is that price is simply a result of rates, among other factors. Though, I don't think rate is necessarily the strongest factor, it is what influences prices.

Though, you are looking at it from a micro level and how it affects your personal bottom line. Let's run the numbers for every $100,000 of mortgage...

(25yr ammort.) 
5yrs cum. Interest @2.25% $10,394
5yrs cum. Interest @4.25% $20,699 
Variance $10,305 
Variance relative to Mortgage 10%

Needless to say, its apparent that rates are a very important factor in your overall value and cashflow. Taking rates into account, the overall value of your home needs to be 10% higher with a higher in five year's time. If you can save 10% off the market value at purchase, then you're even. And if you save more, then you're ahead of the game.

Therefore, it really depends on how much you can save compared to the market.


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## kcowan (Jul 1, 2010)

I would volunteer that it depends on why you are doing the purchase. If you are buying to eliminate rental, then purchase price is paramount.

If you are buying to flip, then rate is all that matters as long as it stays comparable during your term of holding.

Of course, purchase price must be competitive with other comparable properties. But if everything is in a bubble, then rates count for flipping.

(Speaking from bubblicious Vancouver)


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## andrewf (Mar 1, 2010)

So, theoretically the value of a house is the discounted value of the implied rents of the property. So the actual rent doesn't need to change much for the prices to change, if the yield curve falls, which has been the story of the last couple decades. It's not hard to imagine a rising yield curve putting a lot of pressure on house prices. If the 30 year rate ever rose to 8 or 10%, watch out below.


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## sprocket1200 (Aug 21, 2009)

mmm can't wait for the rates to rise and scoop up the spoils...


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## Berubeland (Sep 6, 2009)

Price


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## crazyjackcsa (Aug 8, 2010)

I don't think you can consider them seperately. One has an impact on the other, as rates rise, prices will fall, but in the end, you'll pay the same. The issue, as I see it, is that if you don't account for a rate increase, you end up purchasing too much on price point.


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## sprocket1200 (Aug 21, 2009)

crazy, with low interest you will end up paying much less for the house even if you pay a higher price...

this is what is unbelievable about the RE environment right now. people should be paying off the mortgage even quicker than normal, but they just focus on how much their payment is. it is a rental mentality! if you can't pay your mortgage off in 10 years or less, something is wrong...


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## crazyjackcsa (Aug 8, 2010)

sprocket1200 said:


> crazy, with low interest you will end up paying much less for the house even if you pay a higher price...
> 
> this is what is unbelievable about the RE environment right now. people should be paying off the mortgage even quicker than normal, but they just focus on how much their payment is. it is a rental mentality! if you can't pay your mortgage off in 10 years or less, something is wrong...


Not really, all told you pay the extact same for the house. It's just a different ratio. That's part of the reason there has been such a large run up in prices: low rates. As you stated people focus on the payment. So if the average person prepared to pay 1000 dollars a month, it doesn't matter what the price of the home, or the intrest rate is, so long as it works out to 1000 dollars.


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