Mortgages, Interest Rates, Buy When?

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Mortgage rates have been so low (comparatively speaking) for so long, that todays’ young or first time buyers don’t know any different. Today, they have to decide on 5 year fixed rates at somewhere around 3.65 % or variable rates in the 2.55% range. Fixed rates give you the comfort of knowing your rate and payment for the term of the mortgage while a variable rate is a better rate but may fluctuate with the market. Currently, there is no indication that rates are going to go up, so it is preferable for most people to take a variable rate – but always check with your mortgage broker.

To give you some perspective on how todays’ rates compare historically, let’s assume you’re buying a house for $ 180,000 with 5 % down ($ 9,000), resulting in a new first mortgage of approximately $175,000 (with mortgage insurance fee added in). I will use the FIXED 5 year rate to compare. Buying this house today with an interest rate of 3.69% your monthly payment would be $ 891 and if we assume taxes and heat costs of $ 200, total monthly payments would be $ 1,091. To qualify for this mortgage you would have to earn $ 41,000 annually.

In the last 40 years, the highest mortgage rates were in 1981. Using the same scenario, your mortgage in that year would have been at 21.75%, so your monthly payment would have been $ 3,055 and you would have to earn $ 122,062 annually to have purchased it. Just 14 years ago in 2000, the rate was 8.75%, your monthly payment would have been $ 1,420 and you would have had to earn $ 60,750 annually to purchase it.

Back to the present. Many people try to save more money for their down payment and I certainly would not discourage doing so – but be knowledgeable about the rates and the differences they can make. If you earn $ 41,000 a year now, and you were able to save 10 % of your gross income (that’s HEAVY savings), you would have an extra $ 4,100 in a years’ time. It is reasonable, based on past and present values to assume a modest increase in the price of homes of say 2 – 3 %. At the lower increase, that $180,000 home in one years’ time will cost $ 183,600, so at that point you are only $ 500 ahead. If it increased by 3 %, you would be $ 1,300 behind! Further, if in a years’ time interest rates went up just ½ of a percent, say to 4.19%, your monthly payment would increase by $ 48.00 monthly and over 5 years you would pay $ 809 more interest. Things to consider when deciding to buy a home now…or later.

Lastly, I want to point out the difference it makes by paying a little extra each month. Using the same mortgage data as above, If your payment was $ 891 monthly and you were able to pay $ 925 monthly at the end of 5 years your balance would be $ 2,300 LESS and if you carried your mortgage to the end, that small extra amount would see your mortgage paid off a year and a half earlier.

There has never been a better time to buy a home as far as interest rates go….but nothing lasts forever!

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