If you’re a potential or recent home buyer, you’ve been spoiled by some of the lowest interest rates in history over the last couple of years, which have gone below 4 percent for the most qualified borrowers. It might be hard to believe, but just a couple of decades ago mortgage interest rates were not only in the double digits, but actually approaching 19 percent.
As you know if you’ve ever played with mortgage rate calculators, even tiny adjustments to an interest rate can significantly change not only your monthly payment, but also the total cost of your mortgage over the life of the loan. That’s why so many people over the last few years have rushed to refinance their higher or adjustable rate mortgages so they can take advantage of these historic lows.
In other words, as far as interest rates are concerned, it’s probably never been a better time to be a prospective homebuyer.
How low are rates compared to historical levels?
Taking a walk through mortgage rate history by looking at FreddieMac’s monthly rate chart, is quite the interesting journey. Starting back in the 1970s, rates were in the 7 percent range until the middle of the decade when they began their climb to over 9 percent. By the early 1980s, homeowners were wishing they could go back to single digit percentages as they watched rates steadily rise to as high as 18 percent.
Lucky for homebuyers in the 1990s, mortgage rates starting going down after reaching those outrageous highs, and eventually went back into single digits between 7 and 9 percent by the early 2000s.
It’s only been in the most recent years (after 2010), that mortgage interest rates have gone down below the 5 percent threshold that we’ve become accustomed to.
What do low rates mean for you?
Besides paying less per month, lower interest rates actually increase one’s buying power. In fact, number crunching mortgage experts say that for every 1 percent increase in mortgage rate, your buying power decreases by 11 percent. Translation? As rates rise, the amount of house you can afford will go down. So your dreams of a large home in a specific area might have to be reigned in a bit as you are forced to refocus on lower-priced properties.
Take a look at this example, assuming a budget of $1,150 per month and 20 percent down payment:
With a 4.5% interest rate, your maximum purchase price is $281,250
At 5.5%, that maximum purchase price drops to $251,250.
You might think it’s no big deal — you’ll find a way to be able to handle a slightly higher bill. But also keep in mind that the higher payment amount will also raise your debt-to-income ratio, which is one of the key factors that lenders use to determine your loan eligibility. If you’re already hovering near the maximum amount allowed (usually somewhere in the mid-40 percent range, but this will vary by lender), an interest rate rise could potentially prevent you from qualifying for loan approval.
In other words, if you’re in the market and ready to buy, don’t wait too much longer since rates are not expected to stay low for the long term.
Mortgage rate predictions
While no one can say with absolute certainty that the days of these lowest rates are numbered, mortgage experts are pretty sure that 2014 will be it. According to The Mortgage Bankers Association 2014 June Forecast, mortgage rates will be around 4.5 percent by the end of the year, and 5.1 percent in 2015.
Only time will tell if this actually comes to pass. You could take a chance and wait it out. After all, most experts a couple of years ago would have never predicted that rates would keep dropping for this long. What’s most important is to buy when you’re in the best financial position to do so, and when you find a home that’s perfect for you. If you can make that happen while the rates are at historical lows, then you’ll have the added bonus of lower payments and loan savings for years to come.
Check today’s rates
Get a personalized rate quote and lock in while rates are low. Mortgage rates tend to jump up quickly with little notice, and prepared homebuyers and refinance shoppers benefit from already-locked rates.