Are You Broke Or Stupid?

The title of this post is a bit shocking, no?  I pulled it from an article posted at last week entitled “If You Don’t Buy A House Now, You’re Stupid Or Broke“.  Do I believe you’re broke?  I hope not.  Do I believe you’re stupid?  No, although I’ve certainly been called worse.  Nevertheless, the title still makes you stand up and take notice.

30-year mortgage rate average

If you have a few moments I’d encourage you to read the whole article; Marc Roth talks about the historical lows that interest rates are at, and gives some insight into how they’ve arrived at these levels.  While I find the constant yelling “interest rates have never been lower, buy now!” a bit tiresome and insincere given the current economic climate, the truth is that they’ve never been lower, and Marc gives a good visualization of that.

Where the post really resonates though, is when you look at the true costs of a loan at today’s interest rates.  Check out the section beginning at “Loan Costs”:

We are at 5%. As you can see by the graph above, as the economy stabilizes, it is reasonable for us to see 30-year fixed rates climb to 6% within the foreseeable future and probably to a range of 7% to 8% when the economy is humming again.  If every quarter of a point is worth $12,000 per $200,000 borrowed, then each point is worth almost $50,000.

Let’s put that into perspective. You have a good stable job (yes, unemployment is at 10%, but another way of looking at that figure is that most of us have good stable jobs). You would like to own a $240,000 home. However, even though home prices have steadied, you may be thinking you can get another $5,000 or $10,000 discount if you wait (never mind the $8,500 or $6,500 tax credit due to run out next spring. Or you may be waiting for the news to tell you the economy is “more stable” and it’s safe to get back in the pool. In exchange for what you may think is prudence, you will risk paying $50,000 more per point in interest rate changes between now and the the time you decide you are ready to buy. And you are ignoring the fact that according to the Case-Shiller index, home prices in most regions have been trending back up for the last several  months.

If you are someone who is looking to buy or upgrade in the $350,000-to-$800,000 home price range, and many people out there are, then you’re borrowing $300,000 to $600,000.  At 7%, the $300,000 loan will cost just under $150,000 more over the lifetime, and the $600,000 loan an additional $300,000, if rates move up just 2% before you pull the trigger.

Am I suggesting everyone should buy a home right now?  Absolutely not, but it’s helpful to see what buying a home at today’s fixed rates (not a resetting ARM) will mean in dollars.  It’s also a good starting point for those planning on buying a home in the future, but not necessarily right now, as you can use his figures.

I can’t think of a clever way to end this post, and so I’ll just end it here.  Maybe some of those people were right when they called me stupid. 🙂

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