Mortgage Rates Have Jumped – Should You Wait to Buy?

I talked about this issue a couple of months ago with my blog on “Are You a Frustrated Buyer”.  It’s worth revisiting in light of the recent jump in Mortgage Interest Rates (about 4.5%) and especially when one of my predictions has begun to come true.

Let’s address the pressing issue facing today’s buyers besides the bidding wars.  Interest Rates have jumped in the last 7 to 10 days.  Prior to that, the rates had been slowly rising into the high 3% range.  When Bernanke announced the planned slowdown on Government Bond Buying, most institutional investors completely misunderstood what he meant..  They panicked.  The net effect was the DOW lost over 500 points during a 3 day span and a sharp rise in Mortgage Interest Rates to 4.75%  (or higher) for conforming loans.  Since then the rates have dropped down to approximately 4.5%.  This is a dramatic change from (approximately) 60 days ago when rates were around 3.5%.

The bottom line is that today’s buyers have been spoiled by artificially low rates and essentially FREE MONEY over the last year.  Let’s be clear, interest rates in a Normal Economy are 7% to 7.5% and they will be back. We’re just not sure when; probably 18 to 24 months from now.  That range (7-7.5%) has historically been the benchmark for Mortgage Interest Rates.  So for all of you buyers whining about interest rates moving up, I have a message for you;  SHUTUP AND GET OVER IT.  Today’s interest rates are still GREAT.  I remember when I bought my house in 1985 and was thrilled when I could refinance a few years later and reduce my 10.5% rate to 9.5%.  Further and most importantly, loans at 4.5% pay down 26% towards principle Vs 11% towards principle when rates get back to 7.5%.  Go to this Amortization Schedule website – http://www.amortization-calc.com/ and check it out.  I did this for a $400K loan at 4.5% and 7.5%.  Here’s how that pencil’s out:

Purchase Price – $500K

20% Down Payment – $100K

4.5% – $400K Loan

Monthly Principle & Interest – $2,027

Est. Principle/Interest/Taxes/Insurance – $2,638

Annual Principle & Interest – $24,320

Principle Paid in Year 1 – $6,453 or 26.5%

Principle Paid in Years 1 through 5 – $35,367

Purchase Price – $500K

20% Down Payment – $100K

7.5% – $400K Loan

Monthly Principle & Interest – $2,797

Est. Principle/Interest/Taxes/Insurance – 3,408

Annual Principle & Interest – $33,564

Principle Paid in Year 1 – $3,687 or 10.9%

Principle Paid in Years 1 through 5 – $21,530

The Differences:

  1. Homeowners with a 4.5% Interest Rate will have acquired $34,367 in equity Vs $21,530 or $13,837 MORE wealth in their home over 5 years than the homeowner who obtained a loan at 7.5%.
  2. Homeowner at 7.5% will pay $46,200 MORE in monthly payments over the first 5 years.  That’s a $60,037 sway (combination of extra equity and higher monthly payments).
  3. Qualifying income at 4.5%; this Homeowner needs Gross Income between $74K (no other debt) and $96K (car payments and credit card debt, etc.).
  4. Qualifying Income at 7.5%; this Homeowner needs Gross Income between $95K (no other debt) and $124K (car payments and credit card debt, etc.).

The conclusion about buying now appears intuitively obvious, doesn’t it?  Now you just need a good Realtor® who uses a formula on how to write a WINING BID.

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