How Mortgage Interest Rates Work

Today I had a client ask me a simple question but one that I surprisingly do not hear very often:

How do mortgage interest rates work?

My answer was not quite as simple but I thought I would share it. Basically, interest rates move based on the perceived threat of inflation. In a sense, they are based on how the country's economy is faring. If the economy is doing well there is a greater risk for inflation which pushes long term interest rates higher. Conversely, if the economy is performing poorly then in general the greater risk is for deflation which causes interest rates to move lower in an effort to stimulate the economy.

Inflation is defined as a rise in the general level of prices of goods and services in an economy over a period of time. The more the cost everything rises, the greater the need for higher interest rates to increase the cost of money.

As I said, the answer is not as simple as the question but I hope it creates a sense of understanding of interest rates.

Matt Hanson
Mortgage Planner
Founder
Thriving Artist Alliance

The Good News in the Housing Market

With all of the negative news reports about the housing market, it is easy to become anxious and feel that things will not get better. However, there are many good things happening with regards to the housing market and here are just a few:

• Interest rates are at historic lows. Rates very briefly touched 4.50% a few months ago and have consistently been between 4.875% and 5.125% for the past few months. Refinancing a $300,000 mortgage from 6.00% to 5.00% could save a homeowner as much as $190 per month.
• First Time Homebuyer Credit. As part of the recently passed Economic Stimulus Bill a First Time Home Buyer (defined as someone who has not owned a home in the past 3 years) may be eligible for an $8,000 tax credit (not a deduction but a true cash credit) and would not have to pay back the $8,000 if they live in the home for 3 years.
• The Home Affordability Index. The home affordability index is at multi-decade highs which means it has not been as affordable to buy a home in a generation. This applies to an owner occupied home and a rental property. Rents are covering more of a mortgage payment than in the past 20+ years.

Imagine the incredible experience of buying a new home at a historically low interest rate and receiving $8,000 from the government.

Imagine buying your new dream home and securing a historically low rate so that the payments will be more affordable than at any other time.

What a wonderful time to buy!

~Matt Hanson