If you've been thinking about buying a house but are
discouraged by rapidly inflating real-estate prices, then let me
give you a reason to wait no more: Mortgage interest rates are
still less than half the historical average.
Between 1971 and today, the average rate on a 30-year
fixed-rate mortgage is 8.52%. Right now, according to Freddie
Mac's primary mortgage market survey, it's at 4.14%.
Mortgage interest rates and home prices
I can't emphasize enough how significant this is. For
as I've discussed before
, let's assume you purchase a $250,000 house with a 20% down
payment and finance the rest with a 30-year fixed-rate
At 4.15%, the total cost of the house (interest plus principal
payments) is about $400,000. At 8.52%, by contrast, you'll end up
paying a little more than $600,000.
My point is that mortgage interest rates matter as much as, if
not more than, the actual cost of a house when all is said and
Mortgage interest rates and affordability
It's for this reason economists and housing-industry experts
often refer to so-called "housing affordability," which factors
in both interest rates
home prices to determine whether a typical American family can
afford a median-priced home. And right now, at least from a
houses are still unusually affordable
Since 1981, the National Association of Realtors' housing
affordability index has averaged 124.8, meaning that a family
with a median income has 24.8% more income than they need to
afford a median-priced home. Today, the index is at 159.3!
Excepting the years immediately following the financial
crisis, houses have never been as affordable as they are right
now. And the reason is that mortgage interest rates are still
Low mortgage interest rates won't last forever
This situation can't last, however. As you may recall,
beginning last year, the Federal Reserve started to "taper" its
monetary support for the economy.
What has happened since? Mortgage rates increased from 3.4% to
4.5% between the beginning and end of last year. And while
they've since settled back down to the current 4.15%, they're
ultimately bound to go higher.
Although it may not seem like it now, the economy will at some
point improve in a substantive and sustainable way. And when it
does, interest rates will respond in kind -- that is, they'll
So, by lamenting the current trend in home prices, you may be
missing the point that mortgage interest rates are the single
most important variable when it comes to determining the total
cost of homeownership.
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Mortgage Interest Rates: 1 Big Reason to Buy a
House Right Now
originally appeared on Fool.com.
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