How will rising interest rates impact your home buying power?

If interest rates rise as muchIt has to sound very self serving when a real estate professional encourages homebuyers to buy now, before interest rates rise. Nevertheless, at this moment in time we are seeing a window of opportunity in Silicon Valley, and I am encouraging anyone who’ll listen that it’s time to get serious about purchasing.  Interest rates have been at historic lows for a very, very long time – and that is not going to hold much longer.  At the same time, we have seen a softening of home prices.  The only negative for home buyers is that there’s not much inventory.  This is true in many areas of the country, but especially in California, which is leading the recovery.

How important is it?  The buying power is drastically improved by lower rates, and will be adversely impacted just as dramatically when the rates rise.  Today I spent quite awhile calculating out what happens to payments as interest rates go up, and did so in quarter point increments.  For this example, I used $400,000 since that’s a conforming loan that a lot of first time home buyers might seek, but you can extrapolate and understand what happens to a loan of $1 million or more just as easily. Please have a look:

30 year fixed rate payments with various interest rates

Historically, interest rates are usually closer to 7 or 8%.   (more…)

How Low Can These Interest Rates Go? Now Is A Great Time to Buy a Home in Silicon Valley!

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.