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2010-12-15 11:02:43
Rising Interest Rates in December

It appears that the inevitable has begun to happen. Interest rates have turned the corner and are beginning to slowly creep up again. No one knows if this trend will continue or if we will rates begin to hold steady again. But after sitting between 4% and 4.25% for several months, interest rates are now between 4.75% and 5%. Remember that for every percentage point, monthly payments increase $83/month for every hundred thousand dollars that you borrow. So the difference between a 5% and 6% interest rate on a $200,000 loan is an additional $167/month IN INTEREST and $2000/year IN INTEREST. 


Here is a graph which shows how much (approximately) interest rates affect monthly payments of mortgages:

 

Loan Amount

Payment at 4.25% interest (2010)

Payment at 5% interest (2009)

Payment at 6.25% interest (2002-2008

Payment at 8% interest (92-02)

$100,000

$605

$650

$730

$850

$120,000

$730

$780

$875

$1,015

$150,000

$900

$975

$1,090

$1,265

$200,000

$1,200

$1,300

$1,450

$1,680

$300,000

$1800

$1950

$2,180

$2,530


Here are some examples to demonstrate how important interest rates and loan programs are in determining when it is best to purchase. These examples assume prices will continue to go down next year, which actually doesn't appear to be the case.


Example #1 - Home in Saratoga Springs

1) Purchase this year for $250,000 with the USDA RD loan at 4.25%
Down Payment - $0
Monthly Payment (Principle and Interest) - $1,230 (no mortgage insurance on these loans)
Total Interest Paid -  $193,000

2) Purchase next year for $240,000 with FHA (USDA RD loan no longer available) at 5.5% (could be higher)
Down Payment: $8,400
Monthly Payment (Principle and Interest) - $1,330
Total Interest Paid - $223,000 

Although the home was purchased for $10,000 less, the down payment was $8400 compared to $0, the monthly payments increased $100, and total interest paid increased $30,000. That $10,000 saving on the purchase price doesn't look so good right now. 

3) Purchase next year for $230,000 with USDA RA loan but interests rates up to 6.25% (and interest rates will get back to this level in the near future)
Down Payment - 0% 
Monthly Payment (Principle and Interest) - $1,415.
Total Interest Paid -   $280,000

The home was purchased for $20,000 less but monthly payments increased $185 and total interest paid over the life of the loan increased by $87,000!! That shows how important interest rates really are in determining rock bottom!!  


Example #2 - Townhouse in Provo

1) Purchase this year for $150,000 with FHA loan at 4%
Monthly Payment (Principle and Interest) - $700
Total Interest Paid -$94,000

2) Purchase next year for $135,000 with FHA loan at 5%
Monthly Payments (Principle and Interest) - $715
Total Interest Paid - $112,000

So even if the townhouse dropped another full 10% in value, if interest rates go back up just 1%, monthly payments increase $15 and total interest increases almost $20,000. 


Example #3 - New Large Home in Mapleton

1) Purchase this year for $400,000 with 20% down with 30 year conventional loan at 4%
Monthly Payment (Principle and Interest) - $1,525
Total Interest Paid -$230,000

2) Purchase next year for $380,000 with 20% down with 30 year conventional loan at 4.5%
Monthly Payment (Principle and Interest) - $1,540
Total Interest Paid - $250,000

Even with a savings of $20,000 on the purchase price, an increase of just .5% in the interest rate results in a slightly higher monthly payment with $20,000 more paid in interest. In other words, the home will cost more even though the purchase price was $20,000 less!!


As stated previously, all of these examples assume prices will continue to fall. There is a much better chance, however, that prices will stabilize and begin to appreciate in th near future, in addition to interest rates also increasing. 

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5 year arm trend

Trends June to October 2010

3 year trends


Here is a link with bi-monthly updated interest rates:

http://www.mortgagenewsdaily.com/mortgage_rates/charts.asp


The general consensus from lenders right now is to lock in a right while you can. They concede that rates may hold steady or decline once again, but most feel rates will continue to rise at the current rate unless something in the economy changes. Remember that there was a time that buyers were jumping to lock interest rates in the single digits. Getting a rate now anywhere in the 4%'s or low 5%'s is still an amazing rate.

If you were putting off buying until next year, you may want to reconsider buying sooner rather than later. There is a large inventory of homes now as we are in the slow home buying period, sellers are aggressively dropping prices to be more competitive and buyers in general have more negotiating power this time of year. In addition and most importantly, there is a good chance that we see rates in the mid to upper 5% range or even 6% or higher. 


Home Sales Utah County


You don't want to miss this opportunity to buy. It is a perfect storm for buyers with low interest rates, low home prices, new mortgage options and high rental demand. This is a perfect market for first-time home buyers with steady income, home owners looking to upgrade and investors looking for rental properties or fixer-uppers. 


As always, let me know if there is anything I can do for you. 

 
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