What changes when the interest rates change?

We hear time and time again via the media about historic low interest rates. Well, I have done a little research and found that ten years ago (2001) about this time interest rates were at 7%. Ten years before that (1991) rates were at 8%. Today we are roughly around 4% on a 30-year fixed rate mortgage. (November 2012 rates are in the 3.375% range!)

Now, there were pockets of change during those times. For instance, in September of 2006, the average interest rate was 6.75 % for a 30-year fixed loan. In March of 2000, we hit 8.75 for one month and in September of 1994 the rate was 9.375%. In August of 1984 the rate was 14.5% and in August of 1981 it was 18% – WOW!!

Although there is a great deal of talk about low rates, how long they will last, etc., I don’t think the conversation has been directed toward what that means for you as you contemplate buying a home.

Let’s look at a $300,000 home that you buy as a primary residence. You will make a down payment of 20% so your loan amount would be $240,000. If you bought that $300,000 house in September of 1994 at a 9.375% interest rate, your P&I payment would be $1,996.20. If you had bought in March of 2000 at 8.75%, there would have been little change out…your payment would have been $1,888.08. If you bought in September of 2006 when the 30-year rates were 6.75%, your payment would have been $1,556.64 and 10 years ago with a rate of 7%, your payment would have been $1,596.73. Let’s not even talk about the 80’s, at 14.5% the payment would be $2,938.93 and at 18%, $3,617!

So here we are with interest rates hovering plus or minus 4% on a 30-year fixed. Your payment on a $300,000 purchase with a loan size of $240,000 would be $1,145.80!! To me that’s just amazing. Don’t read this as an encouragement to buy more home than you can afford, but it is for you to be able to look at the payments. (At 3.375% that payment drops to $1061.03!)

When a mortgage broker asks you what you would like your payment to be, he or she is only trying to ascertain whether or not you have done your due diligence with your budget and know exactly what you are able to spend on a monthly housing cost. Always keep in mind that there are other costs to consider along with the P&I amount that you are shown. Things such as taxes, insurance, homeowners association fees, landscaping fees, etc. all need to be taken into account.

I hope you’ve enjoyed reading and that this puts in perspective what “record lows” really means to us. If you have any questions about interest rates, please follow up with me.

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