Market Trends and Timing Your Purchase - Part II - (Interest Rates)

Interests rates are another important factor to consider when deciding if you can afford to buy a home. Many people who have never bought a home before don't realize the difference a point (1%) of interest can have over the life of an amortized loan. For example, on a $500,000 home with a 30-year fixed rate mortgage at 6.52% (today's average rate according to hsh associates) you will pay over $640,000 in interest by the end of 30 years. For the same home, the interest on a 30-year fixed at 7.52% will add up to more than $761,000. That's a difference of $121,ooo if you stay in the same loan for 30 years.


The difference in monthly payment between the two situations above is $336.00 ($3502.92 -$3166.92). So if you can get a loan today for 6.52% you will be able to afford more home than if you wait a year and the interest rate has increased to 7.52%. I am not saying that the interest rate will increase that much by next year, I have no idea what it will be. If you can find someone who does know, please introduce me!


There are many factors influencing interest rates. Most banks will base an interest rate on an index such as the Prime rate or LIBOR (London Inter Bank Offer Rate). These indexes are especially important in Adjustable Rate Mortgages as they will determine what the rate will adjust to when adjustments are made. The Federal Reserve tries to control the interest rate by changing the cost of federal funds, but in the long run the rate you can get is controlled by the current market conditions. Banks will lower rates to compete with other banks. They can afford to lower rates more when the cost of federal funds is lower, but they don't always follow the fed closely.

Interest rates are also affected by your credit score, also known as your FICO (Fair Isaac and Company) score. I will write a separate post about credit scores later this week.

So what is the interest rate market like today, and what is it likely to do? The Fed has been reducing rates to boost the economy for the past several sessions. For more information see Lucy's post Fed Cuts Rates by 3/4 of a Point. Rates are falling, but how much further can they possibly go? I think they will bottom out very soon.

Many lenders will allow a borrower to lock a rate while they are searching for a home for a period of 30 days to 6 months depending on the lender. This is a great way to make sure you get a good rate, but you have to act while the rates are low. The lock only affects the maximum rate; it can still decrease if market rates go down.

If you are considering buying a home, don't let the interest rates stop you now. I doubt you will get much better rates than what is available now.