Friday, September 6, 2019

Rates Have Tumbled!

Turmoil in markets and a flow of cash to the US have created an opportunity for home buyers. Rates fell last week to near all time lows, although not quite as low as a few years ago. That said this will be a temporary lull in rates as things settle out in the markets, rates will normalize again. Buyers should consider taking advantage of the low rates as even a 1/4 point reduction in loan rate can add thousands of dollars in purchasing power.

I have written ad nauseum about the virtues of rate over price. Price is fleeting but rates are forever. Well, 30 years of forever at least. Saving a few thousand on price is nowhere near as important as capitalizing on a rate savings of 1/4 to 1/2 percent. Do not underestimate the power of low rates.

This article I wrote back a few years ago and it still holds true today. I even dedicated an entire chapter to mortgage rates and home prices in my 2010 book, Don't Panic.

originally published July 6th, 2018 by Rod Sager

I have spared no lines of text on the issue of higher interest. Rising interest rates will severely effect buyers ability to purchase a home if they are not using cash. Buyers will enjoy a a flattening price market, but they will not enjoy having their dollars stretched thin by rising rates. 6 of one half-dozen of the other?

Let's say we offer $350,000 on a house now with rates at 4.5% FHA. Buyer will need $12,250 cash down. The PI payment (principle and interest) is $1,711 per month for 30 years. Now the property taxes and mortgage insurance will be added to the payment as well, but interest rates do not directly effect those values. If a buyer waits a couple of months to offer they may find a similar home priced at $355,000. Now if rates remained the same the down payment is now $12,425 and the new estimated PI payment is $1,736 per month for 30 years. That's not so bad, right just $25 a month more. Well, sort of, over thirty years that's $9,000! But this year rates have been slowly climbing so it is far more likely rates will have risen over the next couple of months and probably that 4.5% now will cost 4.75%. With the higher rate, the payment moves up to $1,787 per month. That's $76 per month MORE for 30 years which adds up to $27,360.

Most importantly is that the rising rates was more damaging than the rising prices. The amount of additional monthly income required to qualify for an extra $76 a month payment is going to be $160-$230 depending on the loan type and credit profile. Many buyers get priced out on rates rather than actual home appreciation values.

It is important to remember that loan officers will give an approval based on the price of the house, but the underwriter is actually approving a monthly payment not a purchase price. The loan officer converts the payment into a price to make shopping a little easier for the buyer.

It is very important to understand that the average mortgage rate has been very low for nearly 10 years. In fact The 46 year average Freddie Mac 30 year fixed rate dating back to 1972 is over 8% So even as rates rise into the fives they are still historically low.

The chart below shows the loss of purchasing power as rates rise. Please note the chart is only looking at Principle and Interest and not the combined payment including taxes and insurance. Rising or falling rates won't directly effect the taxes and insurance. The chart shows an FHA loan with a maximum approved PI payment of $1,500. The actual payment on this loan with taxes and insurance would be closer to $2000. The moral of this story is buyers should take advantage of these low rates while they can.

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