Take an interest in today’s low rates

Robert Bray
Robert Bray

I was driving by a local Savings and Loan about 7:30am on a Thursday morning. There was a line of people from inside the building heading out of the building, and about a block long. Everyone was there to get a chance at applying for a low interest rate loan. It was a special issue of 30-year mortgages called HAC-I. The year was 1978, and the loan interest rate was 8 7/8%. A later allotment of money followed soon, known as the HAC-II at 9 7/8 % and received a similar response. Why? Because other similar 30-year mortgages were priced in the market between 11% & 13%. Yes, what a bargain it was if you were one of the lucky ones who received this low rate loan to purchase a home.

Now, let’s fast forward to today. The banks are quoting 30-year mortgages at 3 5/8%; and a remarkable 2 7/8 % on a 15-year fixed rate mortgage. Simply unbelievable! Those are the best rates in 50+ years; and yet people still seem to be waiting. 

I think there are two primary reasons for the hesitation: One is uncertainty with the national and local economy (certainly understood) and the other reason would be bordering on greed. Simply put, it’s as if people are waiting for “just the right property”, preferably a “steal” and they are hoping that the interest rate will hold steady until they find the right home. They’re waiting on a better deal.

I’m the first to admit that rates are even lower than I thought they would ever be. Having said that, many in the industry are predicting rates will be rising again; as early as year end. There are several reasons cited. Most 30 year mortgages are priced historically about 2 to 3 percentage points above 10 year U.S. Treasury’s. The “Feds” and other countries (namely China) have been buying these Treasury’s because they are one of the safer places to park money; and with the buying spree it’s driven the price of Treasury’s up and simultaneously driven the interest rate down. As the Asian and European economies return to better times, and the Feds buy fewer Treasury’s, the values drop and the rate increases. All of this affects pricing on a 30-year mortgage. It makes sense that rates will not always be this low, as everything, including interest rates, operates in a cyclical pattern and what goes down, must at some point go back up.

But more importantly, let’s take a look at how the interest rate can affect your buying power for a home purchase. If you were to purchase a $200,000 home today with an interest rate of 3 7/8% for a fixed 30-year loan, your monthly principal and interest payment would be $912.00. That same property with an interest rate of 5% (still a great rate) would make the monthly principal and interest payment increase to $1073.00 which represents an 18% increase in your payment, or an additional $161.00 per month. Or looking at it another way, in terms of how an interest rate effects your buying power; if the rate moves from 3 5/8% to 5% you can no longer qualify for that $200,000 home. You are probably closer to the $170,000 range. So waiting for the price of a home to go down would very likely cost you more when the rates move up.

And for sellers of homes, it’s a much better time than a year ago to sell, considering rising median sales prices and lower inventory of available homes for buyers to purchase.

So is it a good time to buy?  No!  It’s a great time to buy.