Buyers Should Forget About Mortgage Rates, Focus on Rising Prices

Yesterday, Freddie Mac reported that the average interest rate for a 30-year fixed-rate mortgage (FRM) rose again to 3.63%. That’s an increase of +0.11% over last week and +0.29% since the start of this year.

So far, the predictions of Frank Nothaft, Freddie Mac’s chief economist, appear to be coming true. He previously predicted a gradual but steady rise in mortgage rates during 2013, perhaps reaching or exceeding 3.75% by year’s end.

Real estate agents and mortgage companies use these trends to motivate home buyers. They point to rising mortgage rates and say that now is the time to buy a house. There may be some truth in this. But home buyers should be more concerned with rising home prices, and less concerned with rising interest rates.

If you wait until later this year to lock in a mortgage rate, you might pay a few dollars more per month. But if you postpone buying a home until later in 2013, you could end up paying thousands of dollars more.

Let’s do the math to see what’s really at stake here.

2013 Mortgage Rate Scenario

Here are two monthly payment scenarios using two different mortgage rates. The first rate is this week’s average of 3.63%. The second rate reflects Frank Nothaft’s prediction of 3.75% by year’s end. The loan amount is the same in both scenarios, $250,000. Home insurance and property taxes have been omitted for the sake of simplicity. Calculations were made using a payment calculator provided by Bankrate.com.

• Monthly payment on $250,000 at 3.63% = $1,140.⁸³
• Monthly payment on $250,000 at 3.75% = $1,157.⁷⁹

So the predicted increase in 30-year mortgage rates would only yield a difference of about $17 per month, on a $250,000 loan. No cause for alarm.

2013 Home Price Scenario

Home prices are another matter. Buyers in some parts of the country could end up paying a lot more for a house, if they delay their purchases until later in 2013 (or beyond).

In some parts of the country, home prices have been predicted to rise by double digits by the end of 2013. Hot markets like Phoenix and San Francisco will likely see even greater gains. Markets that are just now starting to recover, like many on the East Coast, may only see a slight rise in prices — or none at all. But let’s play the middle, for the sake of illustration.

Here’s what would happen to the monthly payments on a home loan that rose by 10%, starting with a current purchase price of $250,000. This time, the mortgage rate is the same, but the loan amount is different due to rising home prices.

• $250,000 at 3.63% = $1,140.⁸³
• $275,000 at 3.63% = $1,254.⁹²

That’s a difference of about $114 per month. Compare that to the $17-per-month difference in the mortgage rate comparison, and you see my point. Home buyers should more concerned with rising home prices, and less concerned with rising interest rates.

Of course, home buyers in many parts of the country will experience a “double whammy” of rising rates and prices over the coming months. So it’s not just a cliche. For these buyers, this truly is the best time to buy a house.

Disclaimer: This article contains forward-looking statements about economic conditions. This information has been provided for illustrative purposes only and does not constitute financial advice. We make no claims or guarantees about future economic conditions such as interest rates and property values.

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by HomeBuyingInstitute.com