Historically Low Interest Rates!

Each person, couple, family is different and the best timing to buy a home in Silicon Valley may vary wildly from one to the next.  But with interest rates this low – low 4s – it’s a good time to be thinking about making use of “cheap money”, get off the fence if you’ve been waiting and plunge in (or if you are already a homeowner, consider refinancing or purchasing investment property).

I believe that the last time mortgages were this inexpensive was in the very early 1960s or late 50s.   (I recall my grandfather having a VA loan from the late 50s or early 60s that was in the fours.) But you don’t have to take my word for it.  Please have a look at this historical mortgage interest chart – scroll to the very bottom of the page.

These incredibly affordable rates are, in my opinion, very likely a “once in a lifetime” opportunity for home buying.  Today I had a look at the average interest rates for mortgages each year going back to 1972 on the FreddieMac site. At the right, please find the average interest rate for each year, and the average points paid.  This year isn’t over but I’m ballparking us at 4.5% (though as of right now, rates are even lower than that at 4.35% and less than one point).

At the risk of sounding old and self-focused, I want to add that when Jim and I bought our first house in 1989, we got a loan at 10.25% and paid 2 points to get it that low. We were ecstatic when a few years later we could refinance all the way in the 8s!  The 7s seemed impossible and when it got into the 6s and 5s, who could believe it!

Right now I have home buyer clients with 20% down who are getting a 30 year fixed mortgage for about 4.25% and 1 point.  Incredible.

Home buyers often focus on the price of the home to decide affordability. But the truth is that when you purchase real estate, unless you buy “all cash” you are buying two things, not one: you are buying a house or condo and you are also buying a loan product. It is important to consider the cost of BOTH.

Interest rates and home affordability: Buying Power with Lower Rates

Let’s say you can afford to spent $2500 per month on your mortgage (principle and interest). How much can you borrow for that budget? Let’s check out your “buying power” for a 30 year fixed loan based on a variety of interest rates.

If you suffered through with a 16% interest rate, your mortgage would be for a loan of a mere $185,907.
At 14%, it would grow to $210,993.
At 12% interest rate, the mortgage would be for $243,045
At 10% interest rate, your loan amount would be $284,877.
At 9% interest, your loan would be for $310,704.
At 8% interest your loan amount would be $340,709.
At 7% interest, your loan amount would be $375,789.
At 6% , the loan would be $416,979.
At 5%, the loan would be $465,704.
At 4.25%, the loan would be for $505,192.

What a difference the interest rate makes!

Conversely, let’s say you own a home and have a $400,000 balance.  If your current interest rate is 6% (not bad, historically), your principle and interest should be at $2389.  If you refinance to 4.5%, the new payment amount will be $2026.74.  Refinancing or getting any loan does cost money (often about 1% of the loan amount).  So if the cost of the refi is $4000, and the monthly savings is $362 per month, it would take only 11 months to break even on the cost of the refinance, and after that, it’s pure savings. As long as you plan to stay in your home more than 11 months, the refinance appears to be worthwhile financially.

Rates quoted are for conventional loans. Jumbos would be at a slightly higher interest rate, of course.
A note about refinancing:

When you buy residential real estate and get a loan at that time, the “purchase money” loan has certain protections in case of a later default. Those protections do not always exist if there’s a later refinance, so before deciding to refinance your property, talk to a tax and legal professional about the ramifications.  Lenders often don’t make this point clear – so do your research.

When’s the best time to buy a Silicon Valley home?

Most often, when interest rates are high, housing prices are low.  When housing prices are low, interest rates are high.  Very seldom do you get the situation where both interest rates and home prices are low.  But that’s the situation we have right now. Will home prices go lower? No one knows, but in most parts of the San Jose area, prices are up about 5% over a year ago. The bottom appears to be behind us.  What about interest rates, will they go lower?  I don’t know the answer but rates don’t normally either get or stay this low, so I wouldn’t count on it.

If inflation becomes a problem, then interest rates will go up. If the economy begins to recover more strongly, interest rates ought to go up.  I could be wrong, but right now it appears to me that we have a window of opportunity. I intend to take advantage of it myself!