With cheap mortgage rates topping 5 percent
for the first time since April 2010
, it's time to start getting serious if you're thinking of buying a home. While rates are still historically low, as the government begins to make decisions about what to do with Fannie Mae and Freddie Mac
, you can be certain of one thing -- mortgage interest rates will go up.
hit what will likely be their low in October 2010, when the average rate was just 4.2 percent. This week average mortgage rates are at 5.2 percent -- a full percentage point higher. What will that mean for a $200,000 mortgage? Your mortgage principal and interest payment will be about $110 per month higher today than it would have been if you bought the house in October, when mortgage rates were 1 percent lower.
You may think you're just not ready to buy because house prices
are still falling
in your area. That's true for most areas of the country, but you need to ask yourself, is it better to risk that your house may fall a bit in price than to risk mortgages
jumping too high for you to be able to afford to buy at all?
Those who took advantage of the 4.2 percent interest rates will save about $40,000 in interest costs over the life of a 30-year mortgage than someone who buys at today's 5.2 percent rate. During that 30 year period the home price
will definitely increase from what they bought the house f
or in October 2010. Even if the price falls a bit more in 2011, long term they will likely see a profit in their home plus save all that money that would have gone to interest payments had they waited just four months.
Even if you missed out on that savings, we're still looking at mortgage rates that are historically cheap. So don't let the recent rise keep you out of the housing market if your dream is to own a home.
You may wonder how high rates can go. Many people forget that just about two and a half years ago 30-year mortgage rates were 6.48 percent in August 2008. That's 1.2 percent higher than today and that's when Fannie and Freddie were actively buying mortgages
. What happens when they slow their purchases and you have to depend on the private mortgage marketplace? Right now about 90 percent of mortgages are being bought by Fannie, Freddie or by the government through FHA or the VA.
The highest 30-year mortgage rate we've seen in the 2000s was 8.52 percent in May 2000. Could that happen again? Possibly, especially when the government cuts back on guaranteeing mortgages. The private mortgage market will prevail and all experts agree without a government guarantee 30-year mortgages can be a risky business. You may wonder how high rates can go. The historical high of 17.60 percent was in February 1982.
Some people are already choosing adjustable rate mortgages
(ARMs) as fixed-rate mortgage rates rise. If you're a sophisticated money manager that could be a good choice for you, but remember many of the people who ended up in foreclosure
did so when their ARM payment made their monthly mortgage payment unaffordable. So be sure you understand the full implications of any ARM before choosing that option.
If you are thinking of buying a home, do so now before interest rates make your dream unaffordable.
Lita Epstein has written more than 25 books including
The Complete Idiot's Guide to Improving Your Credit Score and
The 250 Questions Everyone Should Ask About Buying Foreclosures
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