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Comment by dagw | Hacker News Reader

But if you need to get a mortgage, then the cost of that might very well have gone up by more than the housing prices have dropped.

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Not necessarily. If the price goes down, the amount of mortgage you need to get also goes down. It becomes easier to save for a downpayment. A bigger downpayment means saving on possible expensive mortgage insurance.

Prices aren’t dropping that much to offset a tripling (or more) in interest expense. Or we have a long way to go at least.

We were in a position to buy during the last crash, when there was a bit of a discount off the bubble. So in my experience, in the long run, paying less up front is better than paying more.

I’d agree but don’t think it’s the right comparison for this discussion. It’s more about how much prices have to come down from their recent highs to offset the recent uptick in interest expense.

I bought my first home at end of the last recession (price at floor for my market) and maximized my leverage (little down) AND got low rates. So I did great and assuming you did the same it probably worked out the same for you. But the high rates now make the math a bit more complicated. And, I don’t know if I’d assume the same level of appreciation I did back then. At that time, the recession was a few years in and it felt like that bulls were awakening so I was very confident in my purchase. Right now, it’s early in the recession, we don’t even know how long/far prices will decline, and rates are pretty high and most assets feel inflated. So, I wouldn’t feel very confident about it right now. I’d actually recommend most people just do lowish down, hope for a refi opportunity in a couple years, but make sure you have some cash for repairs/maintenance/rainy days as well.

In any case, how much does a home price have to come down to offset interest rates climbing? It’s a lot. Probably something like 20% (I can’t do the math rn)

> how much does a home price have to come down to offset interest rates climbing

Generally speaking it's a rule of 10x in purchasing power (not price, clearly, because we haven't seen the corresponding price correction yet).

So 1% increasing in mortgage rate should be 10% decreasing in purchasing power, just based on the math. And yes I believe there has been a 2% increase in average mortgage rate (3% -> 5%) so 20% sounds right.

Just wait to see just how little principle you pay at the beginning. Interest rates make a huge difference.

I used to worry about needing to make sure I saved enough so I wouldn't have to pay any PMI. I really didn't like the idea of "throwing away" that money. My wife talked me into it and had me actually look at the real terms.

We ended up putting ~10% down on a house. The PMI for that was ~$70/mo. We refinanced a year later and the home value increased that we were able to get rid of the PMI after only a year. I would have missed out on the lowest interest rates ever really seen and bought with house prices getting even higher over $840 in insurance on a several hundred thousand dollar purchase.

I would suggest you don't assume you need to avoid PMI. For me, if I would have waited it would have cost me >$100k waiting to avoid "throwing away" $840. Obviously, every market is different, every buyer is different, the financial world is different now than a few years ago, your mileage may vary, I am not a lawyer, etc. Just saying, look at some actual terms before deciding.

No, you don't need to avoid PMI. If you can, then it is better.

> If you can, then it is better.

That's the whole point of my comment, it isn't always better. I could have avoided any PMI by waiting a bit longer to amass more savings to have a larger down payment. But in doing so I would have avoided <$1,000 in PMI payments but increased the cost of the house by >$100k. It was definitely the better move to just pay the PMI in this case than to try and avoid it.

I'd gladly pay $1,000 to make something >$100,000 cheaper in the end.

Not necessarily. PMI removes risk for the lender so often that means a better rate. Also the bigger the loan the easier it is for them to make their fixed costs back. A lower down payment usually makes sense if you have the discipline to invest the difference and can tolerate some risk.

I assume you would feel differently if the market had crashed and your purchase price was $100k less though… avoiding PMI while also having a lower principal. Hindsight.

Doesn't matter. You can refinance when interest rates inevitably go down.

A 4-8% discount multiplied by 5:1 (or 33:1 leverage) is ENORMOUS. It dwarfs an extra 5-10% monthly expense for a year or two or three.

Especially considering R/E capital gains are mostly tax free.

Yea, I forgot that the US allows free refinancing of mortgages when interest rates drop. That completely changes the calculus.

It's not free; it usually costs a few thousand dollars, so there is a payback calculation to make.

Free in the sense you don't pay a penalty.

In Canada, if you refinance before your mortgage term end it's typically to pay 3 months of interest as penalty or the difference between your new rate and the old rate until the term ends.

It's pretty damn punitive.

What's the rationale behind that? That's really a penalty for early repayment - is it set by law, or is it just something that is part of a standard Canadian mortgage contract?

30-year fixed rate mortgages should not exist.

They only exist in the US and Denmark: https://www.thediff.co/p/the-30-year-mortgage-is-an-intrinsi...

And they only exist because of A LOT of government intervention.

If interest rates don't continue to only go down - I imagine you'll see them disappear in the US and Denmark.

US & EU banks mostly make their mortgage profits from constantly refinancing at ever lower rates.

You are right that they wouldn’t normally exist without government intervention.

But banks don’t profit off the interest rate on mortgages. It’s mostly origination fees. Mortgages are sold off immediately. They don’t hold onto them.

It’s just standard. The standard Canadian mortgage contract is for a 5-year term with a fixed rate. Variable rate mortgages have notably lower costs to end early. (Early repayment terms are typically something like “can optionally pay up to 15% extra per year without penalty.”)

Here in Sweden if I have a fixed rate mortgage and want to repay early or refinance at a lower interest rate, I have to pay a penalty which is essentially equal to what the bank is losing in out on in 'missed' interest payments.

Not sure what you mean by free. But there are time time frames where you are barred from refinancing (not within 6 months of closing on a mortgage - including the refi, so you are in a timing the market kind of situation), and the fees (appraisal, closing costs, origination, points, etc.) that go along with refinancing are usually pretty steep.

Refinancing is not free. There are still costs for any loan like appraisal, possibly an inspection, and recording fees, but some lenders will roll those costs into the loan or offer higher interest rates to offset their costs.

Nonetheless, I’ll take the lower principal of a lower priced house than an over-priced house with a lower interest rate … lower taxes and possibility to refinance at lower rates.

When we bought in 2009, the rate was 4.85%. Later we got it down to 3.5%--a difference of over $400/mo. At this rate we'll have it paid off completely 14 years early.

When are rates going back to under 3%? That was a flash in the pan phenomena, I highly doubt that would ever happen again absent some other cataclysmic event. The current rates are more toward the contemporary average.

> When are rates going back to under 3%? That was a flash in the pan phenomena, I highly doubt that would ever happen again absent some other cataclysmic event.

This is what everyone said after the financial crisis. 3 years after rates moved up from 0% (~2018) - the 30-year mortgage rate hit an all-time low (~2021).

I'm not sure how you can be so confident they're never going lower this time. And I'm completely lost how you can be confident they won't be lower than they are now within a couple of years...

You're completely lost, after looking at the last 50 years of rates, at the chances of it falling to 2021 lows? We're talking probabilities here and I'm confident the probability is very low.

So you observed the last 50 years of rates, and you don't see a downward trend?!

In every country in advanced world??

Very low probability? No way. They push the rates lower than ever before during each crisis, we just have to wait till the next one.

yet you might be able to re finance someday.

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