If you were looking to buy a house 14 years ago, the best mortgage rate you could get on a $150,000 fixer-upper (with 20% down payment) was over 8% fixed. That means your payment would have been about $880. That didn’t sound too bad at the time.
If you were starting over today with a 3.75% fixed interest rate for 30 years (which is the current rate MNB is offering), things would be drastically different. Your monthly payments would be $555. That’s a savings of $325/month or $199,800 over the course of the 30-year mortgage! That’s the difference interest rates can make.
With interest rates at historically low levels, now is the best time to buy a house. Before you do, here are some important questions to ask:
Are interest rates going to go lower?
No one can predict if the interest rate on home loans will go lower, but given that current rates are at historical lows it’s hard to imagine them going much lower. When you add in low rates with the price of homes, which are still low due to the recent down turn in the real estate market, now is a good time to buy.
How can I make sure I only buy what I can afford?
What you can afford depends on a lot of things: your interest rate, your down payment, and your credit rating are just a few things. However you must also take into account how disciplined you are, your current bills, car payment and other expenses. If you have a lot of debt or expenses, making the house payment may be hard to do every month. The best way to determine what you can afford is to meet with your mortgage lender and pre-quality.
What is the rule for what to spend on a home?
You may want a beautiful home in a great neighborhood, however, you may not be able to afford all of that now. Some experts say that you should not spend more than 35% total of what you take home on housing. So if you take home $65,000 a year, you should not be spending more than $22,750 a year (or $1900 per month).
If you focus on what you can afford and find a good place, the equity can soon build in your home. Start small. As you start to pay off the home and make improvements to it, the value of the house goes up until you eventually have a nice little nest egg.
What should I plan for hidden expenses?
Remember that mechanical and structural problems often come up in a house – especially if it is an older house. Remember also that with a house comes insurance and property taxes. These are expenses that you may not have planned. As a general rule it is recommended to save 3-5% for any of these surprises.
Should I go for a 30 or a 15-year home loan?
Many people are excited to own their home outright and a 15-year loan not only has a better interest rate, it sounds very impressive to your friends. However, if circumstances change, the higher monthly payment may be difficult to meet. Instead consider getting a 30-year mortgage and just make one-two extra payments per year. This way the time line will be much shorter and the minimum payment due will make it less risky than a 15-year mortgage.
Purchasing a home is one of the most important decisions that you will ever make. The current interest rates make it easier for it to be an investment that pays off in the long term. Meet with your MNB mortgage lender to learn more about what may be the best loan option for you.