Another day, another story about the housing industry. Many in the industry have been seeking to educate consumers about the coming increase in rates. It usually goes something like this:
Real Estate Agent: ” Now is the best time to buy ever!!! Buy now before rates go up and you can’t afford the mortgage.”
Buyer: “Why are rates going to go up?”
REA: “Talk to Phil at Guaranteed. He has a great handle on this and will make sure you don’t miss out on low rates.”
True story…that is how it all happens. All jokes aside, the recent article below points out that the government intervention in the mortgage market is about to end:
“The Fed has been buying mortgage-backed securities, the bundling of home loans that are used to fund mortgage lending, since late 2008. But next month it plans to complete its purchase of $1.25 trillion in mortgages.”
“There is wide agreement that the removal of this support will mean higher mortgage rates, which could hit housing prices and sales hard.”
To read the full article, please visit http://money.cnn.com/2010/02/23/news/economy/fed_mortgages/index.htm
While the article does delve into some technical things about the mortgage market, I want to point out the most relevant thing to my customers. How will this affect my mortgage payment if I am thinking of buying?
“Higher rates on the way. But even if the Fed holds onto the mortgages it has already purchased, the act of no longer buying additional mortgages is likely to raise mortgage rates in the coming weeks. Experts say a jump of at least a quarter to a half percentage point is likely.” (emphasis added)
For example, take a look at the following scenario:
$250,000 loan- 30 YR Fixed Conventional- Rate of 5%*
The monthly payment would be $1,342. This accounts for principle and interest.
If the same buyer waits and rates do go up by half a point to 5.5%, the monthly payment would be $1419. A difference of $77 a month.
While $77 may not sound like a lot of money. Over the course of a 30 year mortgage, it adds up. It adds up to the tune of $27,720.
So if you are looking to purchase in the coming months, you could save yourself $27,000 if you act sooner, rather than later.
* This scenario assumes a purchase price of $312,500 with the borrower putting down 20% of the purchase price as a down payment. Single Family Residence in the state of Florida, and a credit score of 740. Quote is based of the date 2/23/2010.