Source: Pallspera.com via Flickr.
Over the course of your lifetime you're liable to encounter a number of game-changing events. From starting a family to putting your kids through college, life has a way of throwing your retirement plans for a loop every now and then. Ranking high on that list of life-altering decisions is the debate of whether or not to buy a house.
Baby steps for the housing sector
A house is a big decision for most Americans as it means being locked into a mortgage for 15 or 30 years and likely carrying around six figures in debt. In April of 2014 the Mortgage Brokers Association noted that the average loan size swelled to a record $280,500.
Yet, when it comes to buying a home we've witnessed a severe pullback since the Great Recession. Since 2005 new homes sales have plunged from a peak annual rate of 1.4 million to a pace of less than 300,000 homes sold per year in 2011. Although this figure has rebounded, the Nov. 2014 annual new home sale pace of 438,000 is still well off its pre-recession levels.
Source: Images Money via Flickr.
Why is this? A lot of it has to do with existing homeowners being underwater or being gun-shy about purchasing a home that could drop in value. According to RealtyTrac 17% of homeowners were still underwater on their mortgage (i.e., they owed more to the bank than their home was worth) as of Q1 2014. This is actually a big improvement from the more than one-quarter of homeowners that were underwater as of mid-2012, but it still serves as a waving yellow flag to current and prospective homeowners.
The other factor at play here is a combination of home prices and lending rates. Consumers have witnessed home price volatility firsthand over the past decade, as well as a persistent downtrend in lending rates, so they'd just as soon wait on the sidelines for home prices to stabilize and lending rates to keep falling.
The biggest mortgage mistake of your life
Herein lies the biggest mortgage mistake most people are making right now: waiting on the sidelines for rates to move lower instead of actively hunting for a home at near record-low lending rates.
Since peaking at 18.4% in Oct. 1981, 30-year fixed mortgage rates have been on a fairly steady decline, having kissed the 10% level goodbye in 1991 and not looking back since. In fact, it's been nearly four years since homeowners have seen the 30-year mortgage rate even hit 5%!
Source: St. Louis Federal Reserve.
There is some speculation that global weakness caused by political turmoil or falling oil prices could cause the Federal Reserve to hold off on boosting the Federal Funds rate in 2015, but the widely accepted forecast on Wall Street is that mortgage rates will soon be on the rise.
So I pose this question to prospective homeowners or those looking to refinance their mortgage: Why wait?
According to annual average 30-year fixed mortgage data from Freddie Mac over the past 40 years the average 30-year mortgage rate is 8.49%. In Dec. 2014 the average 30-year rate was a mere 3.86%. That's 55% below the average 30-year lending rate homeowners have paid over the last four decades.
Source: Flickr user WoodleyWonderWorks.
What exactly does this mean for homeowners? At the aforementioned $280,500 loan level and a 30-year fixed mortgage rate of 3.86%, a homeowner will pay $1,317 per month for a grand total of $473,979 including interest over the life of the loan (assuming a minimum payment for 30 years). At the average 30-year lending rate over the past four decades of 8.49% our fictitious homeowner would pay a whopping $2,155 per month for a grand total of $775,733 over the life of the loan. That's nearly a half-million dollars in interest! Not to mention the average paid in Dec. 2014 was just 0.6 of a point compared to 2.5 points in 1984-1985. That's thousands of dollars in additional savings for today's homeowners.
Instead of trying to nickel-and-dime your home purchase and lose sleep in the process, I'd suggest you give serious consideration to locking in an almost record-low mortgage rate now if you're looking to buy a new home or to refinance. The peace of mind you save in the process will be well worth it.
