April 24, 2013 - The “Difference” When Interest Rates Start to Rise

Picture 1December 19, 1980. Prime Rate: 21.05%

The above statistic is shocking but true.  Interest rates have been very low because of our country’s economic struggles over the last 5+ years.  As a veteran of the New Home Sales Industry, I believe that today’s buyers have become complacent and naïve about how easy and affordable it truly is to buy a new home.  The 3.5% – 4.0% interest rates that we are now enjoying will not last forever.  As the housing market improves (and it is showing signs that it is), the interest rates will start to go up again.

When I first got into the business of selling new homes in the mid 1980s (at Lexington Homes), people were so excited that the interest rate had come down under 10%.  Most of my career the rates were in the 7 – 8% range.  Today’s rates are  3.5 – 3.75%!  This is incredible!  Especially with people renting at top dollar right now.  So what is the real cost of waiting?

When I meet with a young person in their 20’s or 30’s who says to me that they might wait to buy, I think “wait for what?”  It is highly doubtful that these interest rates will be this good next year.  Here is an example: if you are considering a 280,000 mortgage for a new home, the Principle and Interest would be at 3.5% which equates to 1257.00/month.  When interest rates go up (and they are going to) say to 4.5%, that same payment will be $1419.00.  If they go up to a “still reasonable rate” of 5.5%, the payment would be $1590.00.  The difference of 2% points is $333.00/month!

When I talk to a “more experienced” person, say in their 50’s, they sometimes tell me that they want to wait for their home to get back to the value it once was.  I tell them if their house is less, then the one they want to buy instead is less, too. Also, will their home increase enough in value to make up for what the interest rates may be at that time? Builders have kept their prices at “rock bottom” to help encourage those who might be waiting.

For today’s New Home Buyer, the worst thing to happen would be raising prices and raising interest rates.  I believe we are going to see both in the next year.  This makes right now the best time to buy a new home!

At Lexington Village at Rob Roy, we are down to the last 3 available homes.  Come see this beautiful community of 15 Row Homes in Prospect Heights soon!