The 30 year fixed rate mortgage averaged 3.58% during the week ending Aug. 29th up three basis points from the previous week. However, mortgage rates remain near the lowest levels they’ve been over the past 3 years. For example, a year ago rates were as high as 4.69 %.
This presents a prime opportunity for potential homebuyers. If you’re looking to get out of the rent race, it means the most affordable and opportune time for interest rates in years. If you’re renting, you’re simply paying your landlord’s mortgage.
The overall landscape presents good timing for potential homebuyers.
Inflation is low. The real estate markets have cooled down compared to the last few years and there is less bidding wars going on. There are also fewer buyers once the school year begins.
Mortgage rates loosely follow the yield on the 10 year treasury which has remained low due to the increasing demand for bonds over the past few months.
Unemployment is low, housing price growth is stable and the Federal Reserve is committed to do their part to keep rates low enough to maintain economic expansion.
Lower rates have also increased the purchasing power for potential homebuyers compared to a year ago. Based on the rate decline of the past few years the average homebuyer can purchase 15% more for the same monthly payment. For example on a house that costs $300,000 with the current rates you could purchase $45,000 “more house” than a year ago while keeping your costs the same.
Here are a few reasons why you might want to consider buying a home in the current environment:
- Rents are expected to continue increasing over the next 12 months as they have been during the past decade. For many renters, there comes a point where the low rate environment allows for a home buying option that is similar to their monthly rental costs. If you have been renting then the current rate environment may crease favorable conditions that make home buying a better choice.
- Your credit may have improved or may not be as bad as you think. Some renters are locked out of home ownership because they can’t qualify for a mortgage. This is often due to carrying too much debt, a low credit score or not enough savings. Some borrowers can qualify for a mortgage with credit scores as low as 500 and may not realize it. Of course, the higher your credit score is the lower your rates and down payment. A lender can work with you to identify what issues to address first to improve your overall score.
- You have been good at managing your debt. Your debt to income ratio is calculated by adding up all monthly debts and dividing the sum by your gross monthly income. Some conventional loans will allow debt to income ratio of 50% but typically the max they allow is 43%. If you had a higher debt to income previously but you paid it down and now it’s lower you will be in a better position to get pre-approved.
- Down payment required is less than what you may think. The old idea of having 20% down is a myth. Some mortgage known as FHA loans only require 3.5 % down. Conventional loans backed by Freddie Mac and Fannie Mae only require 3% down and some government loans backed by Veterans Affairs and US Dept. of Agriculture require no down payment at all. Keep in mind that if your down payment is lower than 20% than you may be required to pay private mortgage insurance.
If you think you are ready to begin the homebuying process the first step is to get pre-approved with a mortgage loan specialist.
This will help you find out how much house you can afford, what loan program is best for you situation and what price range so you don’t overextend your budget.
The most predictable loan option is a fixed rate loan for 15 or 30 years.
Keep in mind that owning a home involves other expenses such as property taxes, homeowners insurance and repairs and maintenance that can increase your monthly costs over time. So plan ahead and be prepared.