Trying to time the market can cost you thousands
It is a fact that even small increases in interest rates can greatly affect the bottom line of the money you pay over the life of a loan. For example, on a $200,000 home purchased with a 30-year fixed rate mortgage at 6.5%, just a half point rise in rates to 7% would equate to $23,928 in additional interest paid over the life of the loan.
According to Bankrate.com's weekly national survey of large lenders, Mortgage rates dropped to the lowest level since Jan. 25, with the average 30-year fixed rate now 5.58 percent as of December 1st, 2006. For updated information on mortgage rates click here.
But, waiting to try and time an exact market bottom is a losing game. Even those who follow the markets for a living can’t figure it out and many feel we are indeed experiencing it right now.
Home prices and interest rates don’t move in unison
Here’s another fact to consider: Home prices don’t necessarily move in unison with interest rates. Think about it- if you decided to wait to purchase a new home, even just a few months from now, and the price were to actually drop $10,000 more from where it is today (unlikely!), you could still end up losing money! How? If interest rates were to move up just half-a-point during this time period, the savings on the reduced home price would be more than offset by the higher monthly payments you would be making over the life of the loan!
The time to buy is now
In short, the smartest and safest time to buy is now. We know that interest rates are low today. We know that home prices are down. We know that there are plenty of homes on the market to choose from. We know that sellers are willing to bargain. And we know that builders are willing to offer attractive incentives to get your business. Any or all of these favorable variables could change for the worse six months from today.
Understanding your opportunity in todays market
LOOK FOR TRENDS IN THE DIRECTION OF INTEREST RATES: Interest rates move in sync with the economic cycle. When the economy is strong, rates tend to rise as potential homebuyers flock to lenders. When the economy is weak, rates tend to drop as lenders compete for fewer homebuyers.
UNDERSTAND THAT A TRADE-OFF EXISTS BETWEEN INTEREST RATES AND POINTS: Most borrowers pay at least one point when they close on a mortgage loan. One point is equal to 1% of the loan amount. Lenders are usually willing to let you “buy down” the interest rate if you pay more points upfront.
CALCULATE YOUR TRUE INTEREST COST: Instead of concentrating on the interest rate, focus on the annual percentage rate (APR) of a mortgage loan. The APR is the true cost of credit and includes your closing costs in the calculation. Under the Truth-in-Lending Act (TILA), lenders are required to disclose the loan’s annual percentage rate.
CONSIDER PAYING FOR AN INTEREST RATE LOCK: Mortgage lenders generally offer a loan rate that is good for 30 days. This is called an interest rate lock. If you don’t close within the 30 days, your rate may change to reflect the lender’s change in its cost of funds. If you think rates may rise, you may want to hedge by negotiating a longer rate lock period, even if you have to pay a fee. On the other hand, if you think rates are headed lower, a rate lock would work to your disadvantage.
NEGOTIATE, NEGOTIATE, NEGOTIATE: Good deals start with the buyer, not the market. Before buying a home do your homework. Find a lender you can trust, and when push comes to shove, has your best interests in mind. Rely on referrals from friends, co-workers and neighbors who are homeowners, not the Yellow Pages. Take advantage of seller discounts, interest buy downs, and don’t be afraid to negotiate.
Information provided courtesy of HSH Associates Financial Publishers