The Impact of Interest Rates

Some potential homebuyers are sitting on the sidelines waiting for housing prices to hit bottom. It makes sense to buy a house at the lowest price possible but there are other critical considerations to keep in mind. Trying to time the bottom of any market is always difficult. Also, interest rates are at historic lows, and many homebuyers fail to consider the savings that come with low interest rates, particularly over the life of the loan, or even the partial life of the loan.

Mortgage rates are low because of the recession and foreclosures. In addition, the Federal Reserve has moved aggressively to push down mortgage rates by buying as much as $1.75 trillion of housing debt and Treasuries this year. This policy has been successful. Rates on 15-year and 30-year fixed-rate mortgages are hovering at historic lows.

What does this mean for you? On a 30-year fixed-rate loan amount of $200,000 at 5%, the interest paid over the life of the loan is $186,512. That brings the total loan payments to $386,512. At 6%, the amount of interest paid rises to $231,676, a 24% increase. At 7%, it’s $279,018, a 49% increase. The lesson here: Keep in mind, what might be gained from a further drop in housing prices could easily be lost by a rise in interest rates.

With regards to the market, let’s review some recent indicators. Pending home sales, a forward-looking indicator based on signed contracts, rose 6.7% in April, the biggest monthly jump since October 2001. Existing home sales rose 2.4% in May with some homes, once again, receiving multiple offers. And the most recent Standard & Poor’s/Case-Shiller 20-city housing price index shows the month-to-month decline in housing prices has stalled from 2.8% in January to February, 2.2% in February to March and 0.6% in March to April. This has led many industry experts to anticipate that soon the decline in housing prices will bottom out.

If you have a house in mind, this might be a great opportunity to purchase a second home or investment property.

This article was reprinted with permission from David Bolton, Loan Officer, Prospect Mortgage.