Tuesday, July 17, 2012

Why Mortgage Rates Don’t Matter (And Why They Do)

It seems that every day we open our newspapers (or Internet browser) there’s more news of mortgage rates hitting new record lows. In 2011, the record low was 4.45%. Last week, rates dropped to 3.56%. The low rates garner media attention, but they don’t matter to buyers as much as you’d think.

Someone confident in the economy, their own job security, and ready to move into a home of their own is a potential buyer regardless of rates. In the 1990s, the average mortgage rate was 8.2%. It was also the decade of the housing boom. It’s consumer confidence, not rates, that puts buyers into homes.

We can easily look to our history for more evidence that rates don’t make much difference. When rates took a dip in 2011, the media compared it to the low rates of the 1950s and 60s. In the post-WWII economy, pent-up consumer demand fueled economic growth and a housing boom. Mortgage rates in that era averaged from 5.5 to 6%. Low rates weren’t putting people into homes; returning GIs and the baby boom were responsible for the growth in housing.

Even though rates arguably don’t matter to buyers, they should matter more, especially right now. I’ve written in this column before that now is a great time to buy, despite what some naysayers believe. There has never been a time in history when low rates and a still recovering housing market have combined to create the most housing value. Consumers can buy a lot more house for a lot less money over time.

Homeowners with good credit ratings should watch rates as well. Even if there’s no pressing need for you to refinance, with rates as low as they are, it’s a smart financial move. Here’s an example of what homeowners have done, and what you could save: one of our clients purchased a home in May of 2010 with a 5% 30-year fixed interest rate. Say their home cost $200,000. That would mean they’d pay $186,511 in interest over 30 years.

A little over a year later, when rates dropped, the client was able to get a refinance with no closing costs, rolling the initial equity line into the first mortgage and lowering their rate to 4.38%. Eight months after the initial refinance, they were able to refinance again and get a 3.88% rate. A $200,000 home with a 3.88% rate costs $138,777 in interest over 30 years. All told, the client was able to save themselves $47,734.

Unfortunately, consumer confidence remains low. We focus on the fear that comes with buying a home in uncertain times. This is the best time in our history to become a homeowner if you are reasonably confident in your personal economy. The benefits of buying a home in this market should be enough to overcome buyer apprehension.

– J.D. Crowe, Senior Vice President, Southeast Mortgage

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