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For Americans looking to achieve the dream of homeownership, today’s historically low mortgage interest rates make this a great time to buy a home.
Currently, 30-year, fixed-rate mortgage rates are below 5 percent, according to
Freddie Mac — among the lowest rates recorded in 40 years. As recently as June 2007, those
rates were around 6.75 percent, and they were in the double-digits a little
over 20 years ago.
Why are interest rates so low? Much of it is due to the recent recession and its
aftermath. With the economy in the dumps, demand for loans fell sharply. At the
same time, investors sought safe places for their money, moving away from
stocks and towards fixed-return investments such as U.S. treasury securities
and mortgages. Also, the Federal Reserve increased funds in the financial
system to keep interest rates low and to support the mortgage market. The
combination of weak loan demand and the influx of funds translated into low
interest rates on mortgages and other loans.
Since mid-2009, the U.S. economy has gotten better, as seen in improved gross
domestic product numbers and in declining unemployment rates. Although the
economy is still in the early stages of a recovery, the expectation is that
interest rates will eventually move higher.
All of this means that now is a great time for home buyers, but this opportunity
will not last forever.
As the U.S. economy rebounds, de mand for loans will rise. When the Federal
Reserve sees that the economy is in better shape, it will take away the
additional liquidity it has injected
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into the financial markets. Investors will move away from fixed-income assets
such as mortgages. All this means that interest rates will rise in the not too
distant future.
When interest rates go up, the effect on monthly payments can be dramatic. A
$200,000, 30-year, fixed-rate mortgage with a 5 percent interest rate has a
monthly payment of $1,074. At 6 percent the monthly payments increase to $1,199
— an increase of $125 a month. Total interest payments over the life of the loan
increase by a whopping $45,165.
Homebuyers who are waiting for prices to drop further could be making a costly
mistake. Using the example above, if loan rates went up to 6 percent, the home’s price would have to go down 10 percent — to $189,000 — to maintain the same monthly mortgage payment. House prices have stabilized or
even started to inch upwards in many markets, and it is unlikely prices will
drop that much.
Low mortgage rates and affordable house prices will not last forever.
The longer you wait, the more you might have to pay to achieve your dream
of homeownership. To find out more information about buying a home, contact the
GHBA at 281-970-8970 or visit www.nahb.org.
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