Today, the interest rates are still very low but they will rise soon. It’s cyclic. Some potential buyers may never see a chance to buy so cheap again.
Maybe you are very happy in your actual home, or maybe you don’t see yourself doing something else than renting. But if you have the idea to buy a property, the time is now. And if you don’t, I know you will regret it badly later.
As I write this, the average loan rate for a fixed 30 years is about 5% with no points. And it’s a 40 years lowest!! So this may be a once in a lifetime opportunity.
Historically, in 1970, the rate was about 7.25%, then rose to about 10% in 1973-1974 to then settled at about 8.5%-9% until 1976 to rise again at about 10%, which then, as seen as a OK rate by homebuyers.
But from 1977 to early 80’s, the rate climbed to 18%. Some homebuyers still remember those years today for that fact. Later it was always fluctuating between 11% and 9% until around 2000 when we saw a slow drop of the loan rate down to 6%-7%. That’s why 5% is something rare enough to mention these days…
So, what can we learn from the historical trends and numbers?
In the last 30 years, we saw that 6%-7% was the very low and 18% the very high, with an average of around 9%. So 5% can be seen as a golden digit!
The most important is to understand the actual financial impact the rate has on the cost of purchasing and paying off a home.
Every quarter-point change in interest rates is equivalent to approximately $6,000 for every $100,000 borrowed over the course of a 30-year fixed. While different in each region, for the sake of simplicity, let’s assume that the average person is putting $40,000 down and borrowing $200,000 to pay the price of a typical home nationwide. Thus, over the course of the life of the loan, each quarter-point move up in interest rates will cost that buyer $12,000.
Stay with me now. We are at 5%. It is reasonable for us to see 30-year fixed rates climb to 6% within the foreseeable future and probably to a range of 7% to 8% when the economy is humming again. If every quarter of a point is worth $12,000 per $200,000 borrowed, then each point is worth almost $48,000.
Let’s put that into perspective. You have a good stable job (yes, unemployment is at 10%, but another way of looking at that figure is that most of us have good stable jobs). You would like to own a $240,000 home. However, even though home prices have steadied, you may be thinking you can get another $5,000 or $10,000 discount if you wait (never mind the $8,500 or $6,500 tax credit due to run out next spring). Or you may be waiting for the news to tell you the economy is “more stable” and it’s safe to get back in the pool. In exchange for what you may think is prudence, you will risk paying $48,000 more per point in interest rate changes between now and the time you decide you are ready to buy.
If you are someone who is looking to buy or upgrade in the $350,000-to-$800,000 home price range, and many people out there are, then you’re borrowing $300,000 to $600,000. At 7%, the $300,000 loan will cost just under $150,000 more over the lifetime, and the $600,000 loan an additional $300,000, if rates move up just 2% before you pull the trigger.
What I’m trying to tell is that if you are planning on being a homeowner now or in the foreseeable future, or if you are looking to move your family into a bigger home, then pay more attention to the interest rates than the price of the home. If you have a steady job, good credit, and the down payment, then you really are being offered the gift of a lifetime.
Dec 15 2009
