Mortgage Interest Rates Went Up Again… Should I Wait to Buy?
Mortgage interest rates, as reported by Freddie Mac, have increased over the last several weeks. Freddie Mac, along with Fannie Mae, the Mortgage Bankers Association and the National Association of Realtors, is calling for mortgage rates to continue to rise over the next four quarters.
This has caused some purchasers to lament the fact they may no longer be able to get a rate below 4%. However, we must realize that current rates are still at historic lows.
Here is a chart showing the average mortgage interest rate over the last several decades.
Though you may have missed getting the lowest mortgage rate ever offered, you can still get a better interest rate than your older brother or sister did ten years ago, a lower rate than your parents did twenty years ago, and a better rate than your grandparents did forty years ago.
Mortgage Rates Remain at Historic Lows
The latest report from Freddie Mac shows that the 30-year fixed-rate mortgage averaged 3.61% last week, slightly down from the week before (3.66%), and nearly 20 points lower than a year ago (3.80%).
This is great news for homebuyers who are dealing with rising prices due to a low inventory of homes for sale in many areas of the country. Freddie Mac expressed their optimism for the rates to remain low throughout the spring in a recent blog post:
“We expect mortgage interest rates to stay well under 4% as we head into the heart of the spring homebuying season. We’re predicting it to be the best one in 10 years, which should provide even greater opportunities for first-time homebuyers.”
Below is a chart of the weekly average rates in 2016, according to Freddie Mac.
Rates have again fallen to historic lows yet many experts still expect them to increase in 2016. One thing we know for sure is that, according to Freddie Mac, current rates are the best they have been since last April.
Sean Becketti, Chief Economist for Freddie Mac recently explained:
“Since the start of February, mortgage rates have varied within a narrow range providing an extended period for house hunters to take advantage of historically low rates.”
If you are thinking of buying your first home or moving up to your ultimate dream home, now is a great time to get a sensational rate on your mortgage.
Why People Hate Their Mortgage and Why You Shouldn’t
Many people hate their mortgage because they know over the life of a 30 year loan they will spend more in interest than the house cost them in the first place. To save money it becomes very tempting to make a bigger down payment, or make extra principal payments. Unfortunately, saving money is not the same as making money. Or, put another way, paying off debt is not the same as accumulating assets. By tackling the mortgage payoff first, and the savings goal second, many fail to consider the important role a mortgage plays in our savings effort. Every dollar we give the bank is a dollar we did not invest. While paying off the mortgage saves us interest, it denies us the opportunity to earn interest with that money. Consider this investment: Every dollar you invest is inaccessible. Every dollar you invest has the potential to increase your federal and state tax bills. Every dollar you invest is guaranteed to earn a very low rate of return for the next 30 years. Every dollar you invest makes the investment less safe. Not too many of us would jump at the chance to make this investment, yet millions do every year by pre-paying their tax-deductible 30 year mortgage loan. Remember, the only way to get your equity out is to borrow it back on the bank’s terms, at some unknown rate in the future or, worse yet, sell the house. By pre-paying your tax deductible mortgage you increase your tax bill each year as you have less interest to deduct. The after-tax rate on a 30 year fixed mortgage is often much lower than many conservative investments. The more equity you build up in your home the more risk you take. If you had a disability or job loss, and had to stop making payments on a 100k loan on a 400k home, the bank could still foreclose and you would be out 300k. If you stopped making payments on a 350k loan you would be out only 50k. The same holds true if the home is underinsured or their is a natural disaster, like a flood, that the house is not insured for at all. Most of us think that the more equity we have in our house the safer we are. The truth is that the more savings we have, not equity, the safer we are. Before paying down your tax-deductible mortgage, make sure you have the following financial milestones accomplished:
- Cash Cushion – Build and maintain a cash cushion with 3 to 6 months of liquid living expenses.
- Protection – Establish appropriate levels of disability and life insurance.
- ‘Non Preferred’ Debt Free – Pay off all non-tax-deductible debt (credit cards, installment loans, etc).
- Retirement and College – Plans fully funded.
It is important to realize our financial goals in the correct order. Paying off your mortgage is a great goal. However, it should not be your first, or only, financial goal.