Interest-ing Information about Interest Rates

23 Mar
March 23, 2009

We have seen mortgage rates that were already at near historic lows edge down even further in recent weeks. Depending on personal situations, prospective home buyers are looking at interest rates for 30-year fixed mortgages in the 4% – 5.5% range. Our mortgage partner, Choice Mortgage (an affiliate of Wells Fargo Home Mortgage), has today’s rate displayed online at 4.625% with 1 point.

WOW. WOW. WOW.

Even if rates go up a anywhere from half a point to a point and a half, these are still unbelievable deals!

But really, what does a drop or increase in interest rates mean? How does this affect you? How does this affect your payment on your mortgage should you choose to buy a home this year?

Depicted below is a sample interest rate chart that shows how different interest rates affect your monthly payment (On a sample home purchase with a mortgage of $200,000):

Interest Rate Chart

Fig. 1.1 - Sample Interest Rates on a $200,000 Loan

Essentially, a 0.5% reduction (or increase) in interest rate on a $200,000 loan roughly equates to a $55 – $65 reduction (or increase) in your monthly payment. While a half-point reduction in rates may amount to a small monthly savings, ultimately, “Interest Rate Day-Trading” is a game I would caution us all about playing.

Folks who try and time their home purchase to take advantage of the absolute lowest interest possible are taking a risk. What if rates go up? What if home prices go up? At what point will a rise in home prices offset any savings you get through a lower interest rate? A modest 2% – 6% increase in home prices could offset any potential savings gained through trying to time a home purchase around getting the absolute lowest rate.

There are ways that you can take advantage of this unprecedented buyers market we are experiencing right now – and still protect yourself with respect to interest rate when obtaining a loan.

Inquire with your lender about the possibility of a float down in interest rate should a better rate surface for you prior to settlement. There is typically some cost associated with obtaining a rate float down, but in many cases these costs are tax-deductible if they come in the form of points on a loan – a great benefit come tax-time.

One last thing to keep in mind when shopping for interest rates and the perfect time to buy a home – THE $8,000 TAX CREDIT FOR FIRST TIME HOMEBUYERS! This tax credit is available to first-time buyers who purchase this year and settle on their home PRIOR TO Dec. 1, 2009. If you decide to play the “Interest-Rate Day Trading” game and miss out on this credit to save half a point (let’s say $65 a month on your loan), it will take 123 months (or 10 years) to make up the difference in the full $8,000 credit. Considering folks tend to spend about 7-8 years in their home before moving on…. Well, you can do the math.

Ultimately, making the decision on when the right time to buy a home is a personal one –  but bear in mind that there are many factors to consider, not just the interest rates.

*Disclaimer: Charts and examples shown for illustrative purposes only. For information pertinent to your personal situation, please contact your lender or Carl Mazzan at carl.mazzan@wellsfargo.com or Don Metcalf at donald.metcalf@wellsfargo.com.

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