Are Record Low Interest Rates a Reason to Buy?
February 20th, 2013With the housing sector having seen better days, the interest rates on mortgages have plummeted to the point of reaching an all-time record low, with certain companies charging 4%, and many going even lower than that. There are countless self-proclaimed experts out there who are saying that now is the perfect time to buy a home, and frankly, if common sense is to be trusted, they are telling the truth. However, most people who ask themselves “are record low interest rates a reason to buy?” do not realize that low interest rates are a double-edged sword, and here is a look as to why that is the case.
The Upside to Low Mortgage Interest Rates
First off, let us look at the obvious upside: you are going to be paying less money. This is what most people are going for, and interest rates that can go below 3% are as good of a way as there is to achieve that. This also means that more people out there are now likely to be considered eligible for a mortgage loan seeing as how they would have to make less hefty payments than in the past, not to mention it would make homeowners less likely to default on them. It also should be mentioned that with an increased number of buyers as a result of low mortgage rates, the housing sector will start to recover faster. All in all, this seems like one of those situations where everybody wins.
The Dark Side of Low Mortgage Rates
And so what downside could there possibly be to record all-time low mortgage rates? The answer lies in everyone’s favorite school subject, mathematics. Let us imagine, for instance, that you decide to take a $150,000 loan with the adjustable rate mortgage option so that you start off with a very low rate and have it fluctuate on a regular basis in relation to a certain market index. Potentially-speaking, you could keep the rate quite low for a long amount of time. However, considering how often indexes fluctuate, it is inevitable that at some point, the interest will end up rising, and that won’t be a very nice surprise.
Considering the example above, let us say that you were first paying 4.5% in interest, making all your payments on time and having adapted your lifestyle to the situation. Then, when the time comes to adjust your interest rate, it is found that the index has shifted so as to add 2.5% to your monthly principal and interest. This would mean that instead of paying somewhere around $750 per month (without including taxes or insurances) you will end up having to dish out a bit less than a $1000. As you can imagine, for many people, such a drastic change can be quite hard to adjust to.
And so, to answer the question “are record low interest rates a reason to buy?”; yes, they can be, but only if you go for a fixed interest rate mortgage. What’s more, with an increasing number of people understanding that and taking advantage of it, the rates should increase in the next few years, so if you want to buy a house, now would be a pretty good time. Try these helpful mortgage calculators here.