Tuesday, April 26, 2011

Interest Rates Are On The Rise

Mortgage interest rates are on the rise.  I've been preaching this for some time now (see my blog post of February 21, 2011) but the Federal Housing Finance Agency has made it official:  the average mortgage interest rate hit 5.06% for the month of March.  The last time the rate was as high as 5% was last June.  This latest announcement highlights the undeniable upward trend in mortgage interest rates since November of last year when the average rate was 4.38%.  This represents an approximate increase of 0.124% per month.

As I wrote back in February, the interest rate you pay has a much more dramatic effect on you mortgage payment than the price of the house.  Let's just assume the beautiful home pictured above is your dream house. And let's further suppose it's on the market right now at $400,000.  If you finance $320,000 (a typical 80% loan to value) at 5%, ignoring taxes and insurance for the sake of simplicity, you would have a payment of approximately $1,718.  Let's now assume that, as is expected, property values continue to decline. Let's take a guess of another 5% reductin in property values between now and the end of the year. Let's also assume the interest rates are on the rise and increase at the same 0.124%. Mortgage interest rates would then be around 6.116% - so let's calculate for 6.125% - a much more likely number. Your mortgage, should you wait until December to buy, would then be based on a purchase price of $380,000, you would be financing $304,000, and your mortgage payment would be approximately $1,847, an increase of $133, or nearly 8% more per month than you would have paid had you bought now. Seems crazy, but it's true. My dad always says "Figures can't lie, but liers can figure," and this is a perfect example of that old anecdote. No matter what anyone says about waiting until the market hits bottom they are either dumb or lying. NOW is the time! Those numbers just can't lie. So buy that beautiful home now or wait until all you can afford is:


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