With low interest rates, tax credits offered by the Federal Government, and lower home prices, a “Perfect Storm” has created a favorable time to purchase a home. With two out of three of these incentives ending soon, time may be running out.
Since November of 2008, The Federal Reserve has purcahsed a significant amount of mortgage backed securities to drive down interest rates. At the end of March, the entire budget of $1.25 trillion will be depleted, and this program will expire. This will undoubtedly result in upward pressure on mortgage rates.
As mortgage rates move higher, a homebuyer’s purchasing power decreases. Consider the following example:
Assume that Bill and Carol are comfortable with a mortgage payment no higher than $1,750 per month (this payment does not include taxes or insurance premiums). With a down payment of 20% on a 30 year fixed rate mortgage at 4.875%, they can borrow approximately $330,500. However, if mortgage rates increase by 1% up to 5.875%, given the same parameters they can only afford to borrow $295,500.
When you look at the last 30 years of home prices and interest rates, now is an incredible time to purchase a home. Back in 1982, the average price for an 1,800 square foot home was $100,000 with an average interest rate of 18%. A principal and interest payment for this scenario was $1,507. Contrast that with the current average home price of $200,000 and an interest rate of 5%. The payment on a similar home today is only $1,073.65. That is a monthly payment savings of $455.35 from 1982!
For first time buyers, there is currently an $8,000 tax rebate paid by the federal government. This is not a tax deduction, but rather a tax credit that wil put this much cash in your pocket. There is also a $6,500 tax credit offered for current homeowners who have owned a home for at least five years and purchase a different home as a primary residence. Both tax credits are set to expire on April 30, 2010.
Lastly, it is important to note thathoems are more affordable today than they have been in years. Although home values will likely remain low for awhile, the reduction in home prices has slowed. This is a positive signal that values may be stabilizing.
The Michael Roberts Team at City Creek mortgage is uniquely structured to ensure exceptional mortgage advice and loan management. If you or someone you know are considering purchasing or Refinancing a home, contact me to review options. A 15 minute review will help ensure you are in proper mortgage in your current home or a home you plan to purchase.
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