credit: trulia.com
There’s been a pretty significant amount of hubbub surrounding home mortgage interest rates lately, and the primary reason is because it hits people where it hurts: Their pocketbooks.
In the course of sixty days, from the beginning of May to the end of June, the base rate — or prime rate — of a home mortgage has risen from an all-time low of 3.59% to 4.68%.
Why is that important? Well, let me quantify it for you: A jump from 3.5% to 5.0% represents nearly twenty percent less buying power for a homebuyer. That means someone who could afford to get and service a $200,000 home can now only afford a $160,000 home. Forty thousand dollars’ worth of equity, just gone.
Bear in mind also that these are — as I mentioned earlier — prime rates for mortgages. Prime rates are for people who are considered “safe” by lenders. These folks have sky-high credit scores (730 or above, typically), and enter the purchase of a home with significant initial investments (down payments). Since each individual buyer’s situation is slightly different, the interest rate on a mortgage can be the deal breaker, significantly altering their monthly payment. Folks who enter a deal without much initial investment and have credit scores below 680 will find it difficult to qualify for a mortgage with prime rates.
There are mortgage options (called “products” in the industry) out there which can make home ownership more accessible to those who are not as well-equipped to service a traditional, 30-year-fixed mortgage. Many people have begun once again making use of the Adjustable Rate Mortgage (or “ARM”). The way this loan works is simple: The first three or five years of the loan will be guaranteed to stay at a low interest rate. After that time period, the loan becomes tied to the interest rate of the day (hence, the “adjustable” part).
One of the problems with this type of loan is that people who get them can only afford to pay the initial, low-interest portion of the payment, thinking they will sell the home before they get to the part they can’t afford. As the past five years have shown us, certain events can happen concurrently, and prevent this from happening. It’s part of the reason that foreclosures shot through the roof, and are only now beginning to stabilize.
As a final note, I’ll say this: If you are well-equipped to buy a home, do not delay. Interest rates are rising, and history shows us that rates this low will probably never come back around in our lifetime. If you aren’t quite there yet, put the work in to get positioned well. Don’t get yourself into a position where you can’t afford the loan you have been approved for. It’ll take some time, but you’ll be glad you put in the work. The last thing I’d ever want to see is any of you tossed out of your house because you can’t afford to stay, and the market is flooded with homes exactly like yours, which nobody has any money to buy anyway. The past five years have been transformative for us as a community. Let’s learn from the mistakes of countless others before us, and keep our community strong!
Dream BIG. 