Better Have Interest in Interest Rates

My last Blog entry talked about the fading American Dream of Home Ownership. But there still are some folks, including the Gen X'ers out there who still want to and will buy a home! That's the good news. While home prices are dropping routinely, the bad news is that mortgage interest rates are going to rise. Slowly at first, however as our national economic drama plays out in Congress, the rise will accelerate. So my first tip would be to stop awaiting the market bottom because its the interest rate that will now dictate your affordability factor.


The Mortgage Bankers Association (MBA) did predict an interest rate hike by the 3rd quarter of 2010. And they were correct. By the end of 2010, the rates began to climb out of the 4 percent range. Now they are above 5% and by the end of 2011, I predict that they will be in the 6% range. Yikes! That changes things a bit. A $250,000.00 mortgage at 5% for 30 years would have a monthly payment (excluding taxes, PMI, etc) of $1342.05. At 6% that monthly payment would be $1498.88. A difference of $156.83, which to a first time home buyer does change things. Remember we didn't factor in possible PMI, energy costs, real estate taxes and common charges (if your buying a condo or townhome). Of course, as the loan amount goes up, so does the interest rate spread.

The reason why I am talking about this is because our current economic condition will dictate an interest rate hike very soon. Don't forget, with our nations debt ceiling being reached and budget deficits growing, eventually banks will be finding it difficult to lend at the low interest rates that prevail today. Scarcity will make money more expensive.

Are you getting interested yet? You should be interested because there is a inverse relationship between mortgage interest rates and home prices. Not that home prices need any help falling these days. So waiting for the market to bottom out may not save you any money unless you are buying for cash. Yep, CASH is still KING and having it will get you the bargain that you were looking for. However, if you are going to get a mortgage, that increase in interest rate may change the dynamic of the bargain that you found.

I know, it sounds like the realtor in me is saying, BUY NOW, BEFORE IT'S TOO LATE!!!! Not really, just pointing out an alternate way to look at the market.