We have been happily spoiled for the last few years with low interest rates. Because of the difficult economy, the federal government has worked hard to keep interest rates low to encourage home buying and to get the housing market back on track.
Of course rates haven’t always been this good. I was speaking with a lender friend, Ephraim Schwartz, a partner with O’Dette Mortgage Group, and he shared with me an interest rate chart that went back 40 years. It’s a graphic illustration of how interest rates have changed over time.
WHY IS THIS IMPORTANT?
It relates directly to borrower buying power. Let’s say your monthly mortgage budget was $2,000. How large of a mortgage could you have financed in the last four decades?
HOW MUCH MORTGAGE YOUR $2,000 MONTHLY PAYMENT COULD BUY
| Mortgage Payment | Year | Interest Rate | Mortgage Loan |
|---|---|---|---|
| $2,000 | 1971 | 7.48% | $285,596 |
| $2,000 | 1981 | 16.63% | $143,300 |
| $2,000 | 1991 | 9.25% | $243,109 |
| $2,000 | 2001 | 6.97% | $301,529 |
| $2,000 | 2011 | 4.46% | $396,580 |
These figures are based on a 30-year fixed-rate amortized loan. Can you see what an enormous difference interest rates make in terms of what kind of home you can afford? The larger the loan, the more house you can buy for the same out-of-pocket expense.
WHY YOU SHOULD TAKE NOTICE
We hear that the federal government is committed to keeping rates the same through 2014, but this refers to the prime rate; it does not necessarily apply to consumer loan rates. The prime rate is the rate at which banks loan money to their most creditworthy clients; therefore, loan rates change based on what loan index they are tied to, and what the lender sets as the margin above that index, along with other factors. So you can’t necessarily count on loan rates staying the same until 2014.
WHY NOW IS THE TIME TO BUY
Interest rates have hit all-time lows. They are not expected to go any lower, and really simply can’t. Home prices are stable and in some neighborhoods of the City are rising (especially in the southern corridor near high-tech commuter bus routes). Inventory is low and we’re beginning to see an increased demand. On top of all this rents are high and rising. I suggest you speak with your accountant and see if this might be a good time for you to purchase a home. Learn about the potential tax benefits of home ownership and then consult a real estate agent to get started. If you already own a home, it may be time to consider an investment property because high rental rates are making this kind of investment most attractive.
I hope you’ve found this column useful, and that you now understand why we in real estate are so excited about today’s historically low interest rates. They really are extraordinary, and if you have the opportunity to take advantage of them, you really shouldn’t waste it.
