Do I really need to add more verbiage to this article? Probably not. The chart speaks for itself. But I’m going to chat it up anyways. Buckle up.
Your home affordability factor is directly driven by mortgage interest rates. Basically, when interest rates rise by 1%, your purchasing power falls by about 10%. Since we haven’t really seen interest rates in quite some time, this concept may be foreign to you.
Let me put it conversely. When interest rates DROP by 1%, your purchase power increases by about 10%. That’s amazing.
Let’s breathe some life into this equation. You meet with your lender today, and get pre-approved for a $500,000 home loan. Cool. From the chart above, that’s going to cost you about $2,000/month (today is 12/12/12, and the going rate is 3.2%). While you go out shopping for homes, you notice that there aren’t too many available. So the process is getting stretched out. Finally, you find a home, get into contract, and it’s time to get your loan finalized. Problem: interest rates have slowly crept up by 1 percent. You think, no problem! it’s only 1 percent higher…we’re still at historic lows.
Houston, we’ve got a problem. That extra 1 percent bump in interest rate just knocked $50,000 dollars off of your approval! You can no longer afford that home, as the loan payment has gone from $2,000/mo up to $2,200/mo. Ouch. Unless you get a 10% raise from your boss, this is going to be a no-go.
Now take another look at the above chart. Remember what the charts looked like that led up to the housing bubble (see chart to the right)? Home prices going up, up and away? They look eerily similar. And as we know, all good things come to end. Or at least, they stop being as good as they were before.
So, before interest rates start their ascent and before home prices rise beyond your reach, you owe it to yourself and family to explore the prospect of home ownership! Why pay your landlords mortgage. Pay for your own! Rent goes up nearly every year. When you buy a home with a 30-year loan, your first payment is exactly the same as your last! ; )
Here’s what to do now: and it’s not difficult at all: Contact a lender and tell him/her that you want to get pre-approved for a home loan. They’ll take it from there. Once your pre-approved, your next step: meet with a Realtor to start looking for your home! It’s more exciting that you can imagine. Stop watching House Hunters, and go do your OWN house hunting! (ok, you can watch House Hunters… it’s rather entertaining and informing).
Looking for a trustworthy lender who can you get the best deal? I don’t do loans, but I know some awesome loan agents that can. Just ask me!