Mortgage rates look really good right now. They have never been as low as they have been in 2009, and they probably won’t be returning to these lows again any time soon.
The low mortgage rates have helped a lot of home owners to pay down their mortgages more quickly because of lower payments and lower inters charged. The rates have also caused some people to purchase a home they probably can’t really afford. Let’s look at the numbers:
You are purchasing a $340,000 home and have about $90,000 to put down, meaning you need to get a $250,000 mortgage.
As of December 2009, you can get a 5 year fixed mortgage over 25 years at below 4.25% We’ll use 4.25% for the example.
Your mortgage payment will be about $1,350/month. That’s actually a very nice, low payment on a $250,000 mortgage. Where the real issue comes in is that since the rate is at record lows right now, it has no where to really go but up. The average 5 year mortgage rate over the past 30 years is over 8.7% and over the last 20 years it has been over 8.5%.
Let’s say it doesn’t go that high, but it does go up to 6.5% When it comes time to renew your mortgage after 5 years are up, you will have about $219,000 left on the mortgage. 20 years at 6.5% makes your new monthly payment over $1,630 or an increase of 20%.
Most consumers cannot afford an increase of 20% to their mortgage payment, yet that is a very real possibility, possibly even on the low side. Even the Governor of the Bank of Canada has come out warning consumers about the risk of rising, and he is trying to encourage financial institutions to teach consumers about these risks. Financial Post article
A lot of people think that now is a good time to go into debt, but I would say that now is a great time to pay off the debt, as interest charges have nowhere to go but up. If you have the equity available in your home, clear off your high interest debt (credit cards, other financing) and lock it in at these low mortgage rates. Truly take advantage of low interest rates instead of letting your debt take advantage of you.
Check out our mortgage calculators through our Life Events Planner on our website at www.rockycreditunion.com The Life Events Planner icon is located at the bottom of the home page.
Jerry
Great article Jerry. This makes a ton of sense for a consumer like myself. I am actually thinking of getting my first mortgage and this is great information to keep in mind before making such a huge purchase. There is a certain hype that comes when rates are so low but rarely do you hear people like yourself warning people of the upside risk. Thank you very much and the credit union seems like a great place to deal with!! Keep ut the great work...
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