Why You Should Care About What Interest Rates are Doing Right Now

In January of 2014, the Federal Reserve announced it’s decision to begin backing off on its $85 billion per month bond purchasing stimulus plan.  The monthly $85 billion expenditure was an attempt by the Federal Reserve to keep interest rates low in efforts to stimulate the housing economy, and encourage United States residents to buy homes.  The Federal Reserve did manage to keep long-term mortgage interest rates at an ‘artificial’ record low for some time.  However, as noted in my past blog post titled, “The Honeymoon Might Be Over”, the gradual pull back of the Federal Reserve’s efforts most likely means that interest rates will be increasing.  Over the past two weeks this has in fact been the case.  Mortgage giants such as Fannie Mae and Freddie Mac have themselves predicted rates to be between 5-5.4% by February of the year 2015.

At this point in time, if you are on the fence about purchasing a home this year, it is important to act fast because the outlook on the market indicates that it is going downhill from here.  To add some perspective, see the comparison between interest rates in the figures below:

Screen Shot 2014-02-26 at 3.49.04 PM

Source: Quicken Loans *click image to enlarge*

As you can see, most of the money used to pay off a mortgage loan goes to interest.  The figure above depicts a loan amount of $100,000, on a 5% interest rate on the principal amount that the borrower owes.  Since 5% of the $100,000 principal, the interest paid during the first year of loan repayment is $5,000.  The column marked “Your Payment Per Year” depicts the total interest paid (per year) for someone who can pay more than just the interest amount.  So after 10 years of paying the loan, the borrower still owes over $88,000 because the majority of payments have gone towards interest every year.  Even though the borrower has already paid back $60,000.

Now, let’s explore the how different things become when interest changes by one percentage point.  See the figure below:

Screen Shot 2014-02-26 at 3.49.52 PM

Source: Quicken Loans *click image to enlarge*

When the interest rate changes one percentage point, borrowers spend a significant amount more than they would had they locked their loan at a lower interest rate.  This is the reason why now is the time for an opportunist to buy.  As exhibited in the figure above, for borrowing $100,000 for 30 years at a 5% interest rate, the borrower will end up paying $93,255.92 for the total term of the loan.  For the same exact loan at a 6% interest rate, the borrower will end up paying $115.838.17 in total.  That is a $22,582.25 difference for the exact same amount of time.  That 22 grand could have gone to your child’s college tuition, your retirement account, or even a new car.  It’s important to consider these things when you are planning to buy a home.  Because when we are thinking in terms of interest, times is not always on your side.

Of course, these decisions can’t be rushed.  You can’t control interest rates, but you sure can take control of your financial situation.  Firstly, you must consider your credit score and your savings account.  Good credit is crucial to obtaining a home loan.  Free credit reports can be obtained at www.annualcreditreport.com .  Make sure that there are no mistakes on your credit report.  If you are unsure about how you will possibly pay for your down payment and closing costs, then it is time to consider Down Payment Assistance Programs available to you.  Ours are available at broadviewmortgageorange.com/check-buyer-assistance-eligibility/ .  On the other hand, if you do have enough money for the down payment, consider putting down a larger down payment to save you money in the long run.  The larger down payment that you put down, the better mortgage rate that you will qualify for.  Purchasing points on a mortgage loan is something that can save you money in the long run as well.  A point is pre-paid interest on your mortgage, and each point takes off about a quarter of a percent on your interest rate.  It may sound small, but it can save you thousands of dollars down the line, and not to mention a lower monthly payment for the life of your loan.  A Loan Officer can assist you to help you understand how much purchasing points may help your personal financial situation.

If you have any questions about the information herein, feel free to reach out to the Author, Brittany Williams, at Brittany.williams@broadviewmortgage.com.  If you would like a quick preapproval Click Here, and for assistance with down payment or buyer assistance Click Here.  You are also always free to give us a call Toll Free (855) 692-7623.

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