Why Now Is The Time To Buy A Home

By Amy Bell | April 09, 2010 AAA
Why Now Is The Time To Buy A Home

If you've been humming and hawing over whether you should go ahead and buy that new home, here's a word of advice: just do it! With interest rates at all-time lows and experts predicting potentially major rate hikes, it seems crystal clear that the best time to snag a mortgage is right now.

Tutorial: How To Buy Your First Home - Step By Step

Of course, that doesn't mean that any Joe Schmo off the street should run out and make an offer on a house, especially if he doesn't have enough cash for a down payment. However, if you have a healthy reserve of house savings and the desire to move on down the road, many mortgage pros are stressing that now is the time to make the leap. If you don't kick your home-buying process into high gear in the coming weeks, you may be kicking yourself a few months down the road.

Here are a few reasons why you should go ahead and make that move.

Rates Have Hit Rock-Bottom
Unless you've been living under a rock, you might have heard that interest rates plummeted to historical lows in recent months. As a matter of fact, average long-term interest rates remained below 5% throughout March 2010, according to Freddie Mac. That's more than a percentage point lower than the 6% average we were seeing back in 2008, not to mention the lowest rates we've seen in decades.

However, the Federal Reserve's $1.25 trillion program to buy mortgage-backed securities, which likely prompted our recent rock-bottom mortgage rates, came to end on March 31. As many economists predicted, mortgage rates are already on the rise again. By early April, the average 30-year, fixed rate mortgage had crept up to a little over 5%. Some experts forecast that the rate will continue to climb over the coming months.

Learning From the Past
History shows that periods of significantly low interest rates are generally followed by sky-high rates. Case in point: From 1970 to 1972, 30-year fixed mortgage rates hovered around 7.25% before leaping to 10% by the end of 1973. In 1974, rates slid back down to around 8.5% and remained there until late 1976.

Then between 1977 and 1981, something major happened: interest rates began to rise and rise … and rise some more. By December 1981, rates had skyrocketed to an unprecedented 18%. If history really does repeat itself, we're destined to see some major rate increases down the road.

The Impact of Interest Rates
So what does all this interest rate mumbo-jumbo mean to you, the prospective homebuyer? It means if you decide to wait another year or so to make that move, you'll probably be suffering from some serious regret. Although rates are hovering around 5% right now, many experts predict they will jump to around 6% by this summer.

You may be thinking that a measly percentage point isn't going to make that much of a difference.

That's where you're wrong.

Let's say your lender approves you for a $200,000 mortgage loan. Every time the interest rate increases by half a point, you lose $10,000 or more in purchasing power. In other words, you could afford to buy a more expensive house at a 5% interest rate than you can at a 6% rate. So, if you can afford a monthly mortgage payment of $1,600, you may be able to get a $300,000 mortgage at a 5% interest rate. However, if the rate increases to 6%, you could only qualify for a $269,000 mortgage. And as we all know, $30,000 can make a huge difference in the quality, location and size of a home. (For more insight, see Understanding The Mortgage Payment Structure.)

Plus, the higher the interest rate, the higher your monthly payment. Check out how interest rates can impact your monthly payment on a $250,000, 30-year fixed rate mortgage:

  • With a 5% interest rate, your payment would be around $1,340
  • With a 6% interest rate, your payment would be around $1,490
  • With a 7% interest rate, your payment would be around $1,650
  • With an 8% interest rate, your payment would be around $1,810

In this example, your monthly payment will increase by $150 or more with every additional percentage point. That's certainly not chump change, and it will add up quickly over the years. (To try these calculations for yourself, check out our Mortgage Monthly Payment Calculator.)

A Golden Opportunity
Many real estate and financial experts believe that today's homebuyers are faced with a once-in-a-lifetime opportunity. With interest rates at all-time lows, you can get more bang for your home-buying buck. Of course, these super-low rates won't last forever. As a matter of fact, they're probably inching up as you read this. So, if you have the cash saved up and the desire to buy a new home, it's time to get moving. (Check out this week's top financial news in Water Cooler Finance: Auto Hope, Bubbling Oil And Obamanomics.)

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