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How Interest Rates Affect Your Mortgage Payment

Yesterday, I posted on the fact that my son is in the process of buying a home. I gave my reasons for agreeing with his decision. However, some have questioned whether purchasing real estate at this time makes sense.

Let me give more support to the point that this is the best time to buy real estate in American history.

As Forbes said yesterday:

It really is a good time to buy a house.

The $8,000 credit for first-time homebuyers is still available, as is the $6,500 credit for repeat buyers, so long as there’s a binding sales contract by the end of April. These tax breaks, once expired, aren’t likely to be brought back. Mortgage rates are still low but they’re rising and some forecasters see them topping 6% by the end of the year. Home prices have stabilized; they rose for five months and then held firm, but values are way down from the peak.

Housing Wire quoted Pete Flint, Trulia CEO:

Consumers have a golden window of opportunity to find a great home and take advantage of the tax credit before mortgage rates start to rise. Historically low interest rates currently available and tax credit incentives are the ultimate price reductions for home buyers. As rates rise throughout the course of the year, buyers will need to adjust their purchase price ceiling.

Interest rates have been kept at historic lows by federal intervention. However, the Fed program ends March 31, 2010 and in all probability will not be extended.

The Wall Street Journal quoted Federal Reserve Bank of Philadelphia President Charles Plosser during a speech to the Entrepreneurs Forum of Greater Philadelphia on the subject of the Fed ending the purchase of mortgage backed securities.

We have indicated that we will complete our planned $1.25 trillion of purchases during this quarter. I believe it is important that we do so and reduce our participation in this market, so the private market can once again resume a significant role.

Most experts believe that once that program ends interest rates will rise quickly and dramatically.

The matrix below shows how mortgage payments will be affected by this rise in rates.

It is for this reason, I believe anyone looking to purchase should considering doing it in the first quarter of 2010.

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9 replies
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