An Interesting Perspective
By Chris Crock, MBA, PFP

The Fourth of July is always an exciting time of year for me and my family. We load up the car and head up to the lake. It is a time to celebrate our freedom, family and friendships. Taking for granted the freedoms that we have here in the United States is easy to do. Our rights to property ownership are part of the foundation that makes this country so great. These rights should be cherished and protected at all cost. We also have a free and open market economy that has allowed our country to become the wealthiest in the world. As we all know, the market is subject to change and we have seen some pretty drastic changes in the past month with interest rates.

We have seen a .625% increase in fixed rates in the past month. As of June 11th, the par 30 year fixed conforming rate was 6.500% with 1% origination. This is up from 5.875% for the same loan on May 9th. The rapid rise in interest rates has been caused by the Federal Reserve’s fears of rising inflation pressures. The Federal Reserve attempts to manage inflation by adjusting the Federal Funds Target Rate up or down which in turn causes the Prime Rate to go up or down. What all of this means to you and me is that when the Federal Reserve is nervous about rising inflation, we see mortgage interest rates rise. When there are signs of low inflation, mortgage interest rates have a tendency to move lower.

In the past month interest rates have reached their high point for the past year. While this isn’t great news for someone locking in their interest rate, it is important to keep a historical perspective on rates. The 30 year fixed chart makes this point very clear.

Since April 1971, the 30 year conventional fixed rate mortgage did not drop below 6.500% until July 2002. In that timeframe, the 30-year fixed rate has only been lower 12.4% of the time. The mean average rate over this period has been 9.24%. This makes 6.500% seem like a steal. The difference in an amortized payment on a $200,000 loan with a 9.24% rate and a 6.500% rate is $379.44. Therefore, our payments are historically $379.44 better than average over the past 36 years for this size loan. For every .125% increase in rate that is seen on a $200,000 loan, the amortized monthly payment increases only by around $16.40.

If you are in the process of buying a home, the quick rise in interest rates could create a little indigestion. Hopefully, a little historical perspective will help ease the pain. I always try to focus on the things that I can control. Since I am not the Chairman of the Board of Governors for the Federal Reserve, I do not have the ability to lower interest rates. If I were buying a home, I would have control over doing my research on buying the right house that has good potential to be a great investment. It is important to spend your focus on buying the right property that fits for your lifestyle and financial situation. Choosing a Realtor® that is an expert in the market where you are purchasing is a critical part of the process. Do not fret over the things that you cannot control. By choosing the right home to buy, you can make a great investment in any market.