What Interest Rates Really Mean?

The Fed did this! The Fed did that! Rates are up! Rates are down! Aaaagggh! Okay, now exhale.  In turbulent economic times the media can't wait to report what interest rates are doing.  Pundits prognosticate, forecasters forecast and soothsayers sooth.  When should you buy a home based upon interest rates and when is it the right time?

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The fact is that interest rates, while important, have little impact when it comes to buying a home.  Alright, alright, I'll admit: it's important...but it's not a deal-killer.

There is a fixation on what rates are doing.  A fixation on what rates will be in the future and what rates were in the past.  I've heard potential home buyers tell me, "I'm not sure I want to buy now because rates are ¼ percent higher now and I think I'll wait." I say,  "Wait for what?"  I say let's not look at the rate but instead concentrate on what that rate actually represents ... your monthly payment.

Let's look at what an interest rate move of ¼ percent really does to a $200,000 mortgage.  Say a 30-year interest rate at 6.00 percent "jumps" to 6 ¼ percent. Shall we sit on the sidelines, thinking such a move is suddenly unaffordable?  No.  The payment on a $200,000 loan "jumps" by about $32 a month!

Now let's get a bit more draconian and look at a ½ percent increase and the monthly payment increases by $64.  Putting that into daily financial terms, $64 is about a tank of gas. While not insignificant, it's hardly a reason to stay on the sidelines of home ownership. Right now, buyers should have more urgency than ever. Home prices have declined enough to make buying more affordable than it's been in recent memory and interest rates (whether at 6 percent or 6 1/4 percent) are historically low. It's time to act.

Are rates important? Sure they are.  But are they the end-all?  Heck no.  Interest rates over the past few years have been in a very tight range, with few major swings.  Just remember what interest rates represent, your monthly payment, and pay less attention to the headlines.