An Interest in Interest Rates

As I sit by the Christmas tree, now bare of the annual gift giving, I ponder what the coming year of 2011 will bring. More importantly, what advice can I impart to the buyers who will be active in this market? If you are still on the fence about making your purchase in 2011, I have one word for you: interest rates. Ok, that is two words. But the rates will continue to creep up, as they already have. If you have a favorite house in mind and are sitting back, waiting for the price to drop, you may want to act before the rates rise significantly more. A ½-point increase in your interest rate could make the house much more expensive over the term of the loan than the potentially small price drop. In addition, a rise in the interest rates might not allow you to qualify for the home purchase at all. Be mindful of the interest rates and discuss how the change in the rate might impact your buying power with your lender.

I found this article on the KCW blog spot and, at the risk of plagiarizing, I find that this article explains the pitfalls in plain English. Do yourself a favor and read the entire article; it might save you a lot of money over the next 30 years.

How Do Rising Interest Rates Affect Affordability?
by The KCM Crew on April 8, 2010 • ( excerpts only)

“Let’s say we have a couple making $10,000 a month. Let’s also say, they are comfortable paying (and qualify for) a mortgage payment of $3,500. From that $3,500 payment, we would deduct an estimated $750/mo. for real estate taxes, $100/mo. for homeowners’ insurance, and approximately $200/mo. for mortgage insurance (assuming an FHA loan). That would leave approximately $2450/mo. for Principal & Interest.

At 5% mortgage rates, our hypothetical borrowers would qualify for (and be comfortable paying) a $446,000 base loan amount. At 6%, the same total mortgage payment of $3,500 can only give our borrowers a base loan amount of $399,000!!! A 1% increase in rates, can reduce buying power 10%!!!

What are the implications and possible outcomes of this mathematical certainty?

1. Buyers may wind up with a higher mortgage payment than they are comfortable with and their lifestyles will suffer (in our example, the payment would escalate $280/mo.)…..or worse, they may no longer qualify for their loan and deals could collapse.
2. 
   Buyers will have to “lower their sights” on lesser homes in lesser neighborhoods because their monthly carrying costs are the true determinant to buying a home.
3. 
   Buyers may choose to “wait it out”, hoping that rates will come back down (much in the same way sellers held on to the belief that prices would rebound). There is no logic behind that hope, but that won’t stop buyers from getting on the sidelines.

Forget about looking backwards. To do what’s best for your family, know this;
For Buyers, TODAY may be the lowest interest rate you will be able to get for the REST OF YOUR LIFETIME.

Remember, Buyers and Lenders want the same thing….an affordable payment. The price of the home is secondary to the monthly cost of the home. ACT QUICKLY, if you are looking to buy to get the home you want, in the neighborhood you want, for a payment you want... TIME IS NOT ON YOUR SIDE.”