You may already know that the country is experiencing historically low interest rates, but have you taken the time to examine what this means for you as a potential home buyer?
Right now, the average 30-year fixed-rate loan with no points or fees is around 5%. Forty years ago, in 1970, the 30-year fixed rate was around 7.25%. Since then, the rate began a steady, then sharp, rise which peaked at 18% in the early 1980s. Although the rate did decline to recent levels of 6%-7%, it took nearly 30 years to do so. This tells us that, historically, this particular rate rises much more quickly than it declines.
If you are even considering buying a first time or new home, now is the time to act. Bear in mind that the financial impact of the fixed-year mortgage rate on the cost of purchasing and paying off a home is one of the most important buying factors.
Here’s why this is true:
Every quarter-point change in the interest rate is equivalent to approximately $6,000 for every $100,000 borrowed over the course of a 30-year fixed mortgage. Therefore, if you put $40,000 down and borrow $200,000 to pay the price of a home, each quarter-point increase in the interest rate will cost you $12,000 over the life of the loan. By the same token, if every quarter of a point is worth $12,000 per $200,000 borrowed, then each whole interest point is worth almost $50,000.
To bring this into perspective, consider the price difference over the loan for a $240,000 home at rates greater than the current 5%. At 6%, the mortgage payoff on the same home will be approximately $50,000 greater. At 7%, the total amount swells by nearly $100,000 over the period of the loan.
If you have plans to purchase a home or if you are considering a move to a larger home, you are wise to keep a very close eye on interest rates and act before they take an upward turn. In reality, they stand to affect your mortgage and total loan cost more than the price of the home.
