Interest Rates: What to Expect Soon 

 

There's good and bad news on the horizon for interest rates these days.  Yes, rates are expected to rise, but the good news is that they will probably remain historically low for quite some time.  A recent New York Times article entitled "Interest Rates Have Nowhere to Go But Up" explained that increasing national debt and the eventual recovery from the recession are two of the main driving factors for the projected increase.

 

How high will they go?  Predictions vary, but the Mortgage Bankers Association expects rates to move from their current level in the low five percent range to nearly six percent by the end of this year, and into the six percent range in 2011.  There's a one-page pdf document showing projections into 2012 - click this link to read it: http://www.mbaa.org/files/Bulletin/InternalResource/72524_.pdf

As you can see from the graph below, things could be a lot worse.  Imagine what it was like to buy a home in 1981, when the 30-year fixed mortgage rate topped 18 percent!  Even just ten years ago people were purchasing homes with loans in the eight percent range.

 

 

 

How Much Difference Does One Percent Make?
 
Here's an example of how a one percent increase in the mortgage interest rate affects how much home a buyer can afford (numbers are rounded):

 

A $300,000 mortgage with a 30-year fixed interest rate of five percent requires a monthly payment of $1,610 for principal and interest (not including insurance and taxes).

 

The same loan at a six percent rate has a payment of $1,799 per month, nearly $200 more.

 

In order to keep the payment in the $1,610 range with a six percent interest rate, the loan amount needs to be closer to $269,000, a drop of $31,000 from the five percent loan amount.

 

 

(At higher interest rates this becomes less closely correlated, but it is still a reasonable guideline.)  It's also worth noting that during the first five years the borrower pays nearly $15,000 more in interest with the six percent loan than with the five percent loan.

 

 

If you've been putting off replacing your current mortgage, now might be the time to think seriously about it, especially if you have an adjustable rate mortgage that is likely to reset before you sell your home.

 

For those considering a home purchase, waiting for home prices to drop further is obviously a trade-off, even if home prices do go down.  Any decrease in home values has to be evaluated in the context of lower buying power and more money paid in interest.  That being said, it's never a good idea to feel rushed into buying a home (especially the wrong home) just to take advantage of good rates.

 

In terms of the housing market, any increase in interest rates squeezes some people out of qualifying for home loans and puts pressure on everyone who has household debt of any kind.

 

Most real estate markets throughout the U.S. experience a slowdown during the summer, and since this year the season coincides with the end of the Home Buyer Tax Credit in most states and now a potential increase in interest rates, don't be surprised if housing reports over the next few months start showing signs of a sleepy summer.  There's usually a perk in the fall, however, and the government is taking steps to make it easier to purchase short sales; both of these factors are likely to have a positive effect on fourth quarter housing numbers.

 

 

Are you wondering how different interest rate scenarios would affect your home loan situation?  It's easy to get detailed mortgage information online. (You can also find out how extra payments will affect your principal balance and rate of payoff.)

 

- Just go to the mortgage calculator at www.BankRate.com and fill in the mortgage amount and interest rate.

 

- Instead of clicking 'Calculate,' scroll down to just above the social bookmarking icons and click 'Show Amortization Table.'

 

- Fill in extra payments or leave this section blank, then click 'Show/Recalculate Amortization Table' to see a breakdown of all principal and interest payments throughout the life of the loan.

 

 

 

Ben Stein might look cute sitting next to that sign-toting squirrel in the commercial for FreeScore.com's credit report service (and if you haven't seen that one you might remember the singing pirates from FreeCreditReport.com); however, those websites only give you your credit report after you sign up with a credit-monitoring service for which you are charged monthly.

 

 

A good credit score is more crucial than ever when it comes to qualifying for the best mortgage interest rate these days, so it's a great idea to check your credit scores occasionally.  (It's no fun to apply for a loan and find out that something as small as a forgotten parking ticket that went to collection has bumped you into a more expensive category.)

 

Monthly credit-monitoring can be a good idea as well, but it's important to know what you're signing up for.  Remember, if all you want is a copy of your credit report you can get that for no charge at the AnnualCreditReport.com site.