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Jul 30

Understanding Low Rates Today Compared To Historical Mortgage Rates

Did you know historical mortgage rates fluctuated over time from a high of 18.45% in September, 1981 to a low of 3.35 at the end of last year? In fact, the rates we are seeing right now are so abnormally low for such an abnormal amount of time that some younger buyers believe these are traditional mortgage rates. However, the truth is that we are seeing an end to this rate paradise. Now, we must use our understanding of the

How To Understand The Importance of Historical Mortgage Rates On Buying Your Home Now

The oft repeated line that those who ignore the past are doomed to repeat it, should take heed at how to approach the current real estate market. To do help you do this, let’s review three important items.

First, do not panic. While rates are going up, the chances of seeing sky high rates like there were 30 years ago, or even rates as high as 6 or 7%, which were common around the time of the real estate crash in 2009 are probably not coming back immediately.historical mortgage rates

This is important, because you do not have to rush to find a home. Yes, rates are an important factor in buying a new home. However, you should not buy the first home that somewhat does it for you, because you are afraid of a rate change that might mean $50 per month on your payment. Make sure you are happy with the house before you talk numbers.

Second, do not focus exclusively on the low rates.

The more important factor to consider is your payment in comparison to your income. This rate is called Debt To Income(DTI). While there are a number of different requirements, Fannie Mae wants DTI rates to below 43% of your income. This means all credit cards, car payments, student loans, installment payments, and future housing payments (Principal, Interest, Taxes, and Insurance, or PITI) cannot be greater than 43% of your income.

Using our mortgage calculator, let’s break this down for you. Then we can show you how the new rates will affect your payments.

For example, take a married couple with a combined $6,000 monthly income. They have $500 in monthly credit card payments, and a car loan for $250 per month. They find a beautiful, foreclosed home in Evanston for $200,000. The property taxes are $5,000 per year. The big question is can they afford the payment?

With their banker they determine the monthly mortgage payment is $1,013.47 per month with a 4.5% interest rate. A good friend is an insurance agent, and tells them they can get insurance for $150 per month. Now we can determine their DTI

Expenses:

  • $500-Credit Cards
  • $250-car loan
  • $1,013.47-Principal and Interest
  • $150-insurance
  • $416.67-taxes

Total: $2330.14

Now, we divide $2330.14 by $6000=

38% Debt To Income Ratio

Why is this important? Because if the rate were 3.5% then the payment would be 898.09 per month. This is a savings of $115.36 per month.

However, their DTI at a 3.5% interest rate would be 37%. In other words, it will not significantly change their ability to buy a home. Looking at the historical mortgage rates, we can see how little the low rates affect buyers purchasing power.

Step 3: Third, if you are still concerned then speak with a professional mortgage broker. While you can do a lot of research online, you still need to have a professional help you with the mortgage. Connect with your banker, and find out what the next steps are. They will provide you with an in-depth look at how the rates today will really affect your purchase.

Putting Historical Mortgage Rates In Perspective

The rates today are just starting to trend upwards, so take your time and make an educated decision on buying your home. Understanding how rates affect your payments and lifestyle. However, make sure that purchasing your home is not all about the rate going from 3.5 to 4.5%. Instead, focus on purchasing the right home in your budget.

Let us know if you need help determining how a return to historical mortgage rates will affect your future purchase?

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