Timing Is Everything For Buyers And Sellers

By Lisa Scontras

Mortgage interest rates are up this month and expected to continue to climb bringing what is anticipated to be the last call for homebuyers to score the lowest rates on record in decades.

“This week, rates went up to 4.75 percent with 2 points, which is up a quarter of a point from early January and nearly a full point increase since October,” says Kevin Miyama, sales coach and trainer at Prudential Locations. Sustained low mortgage rates — the lowest in 50 years — have provided many first timers with the buying power needed to make the leap to homeownership on Oahu in 2009 and 2010. As rates drift back up, consumer confidence grows, and the economy slowly but surely pulls out of the Great Recession, there is plenty of motivation for homebuyers to maximize their buying power now by jumping into the market in 2011.

The strategy “to wait” in 2011 may cost you, whether you’re a buyer or a seller.

“Sellers need to understand that rising rates will affect them as well,” says Miyama. “As the interest rate rises, the inventory of qualified buyers starts to shrink.” Here is why:

Affordability is a function of how much a buyer can afford to pay each month. And the buyer’s monthly payment is a function of price and interest rate. When the interest rate goes down, a buyer can either buy their dream home for less money or buy a bigger home for the same monthly payment. When rates slowly drift up, the opposite is true.

“On a $500,000 purchase, with 20 percent down, you’re looking at a $400,000 mortgage,” explains Miyama. “A 30- year mortgage at 4.75 percent interest equates to a monthly payment of $2,086.59. When the interest rate goes up one point, to 5.75, the monthly payment goes up to $2,334.29, an increase of $247 a month.”

Once rates start rising, even if the price of a home goes down, the buyer will likely pay more. When interest rates go up, the monthly payment goes up. Over the course of 30 years, the buyer of that $500,000 house in Miyama’s example will pay an additional $89,172.

According to Miyama, seeing stock market gains and the Dow Jones industrial average break 12,000, accompanied by a bounce-back in tourism locally, and the strong year-end housing statistics, point to a return to more normal levels. The question about where mortgage interest rates are headed in 2011 is not if they will rise but when.

“No one has a crystal ball,” says Miyama. “What we tell clients is ‘What goes down must go up.’ I hope the increase is gradual, but there is really no way to predict it.”

But there is a way buyers can hedge against any future increases, he says, by locking in a rate as soon as they obtain an accepted offer for a home.

According to Freddie Mac, with the current forecast of a 5.2 percent average in 2011, interest rates are still near the bottom historically.

Freddie Mac began tracking interest rates in 1971, and predicts that 2011 will be the third lowest annual average behind 2010 and 2009. Low mortgage rates means that homebuyer affordability is still very high.

“I think buyers understand that the lower the interest rate, the higher their buying power,” says Miyama. “This means they have an increased inventory to choose from because their money goes farther.” Miyama says a discussion about interest rates and loan types should be part of any home buying plan. Talk with your Realtor today about how interest rates could affect the likelihood of buying your dream home in 2011. And don’t wait.