Hornung: Low rates can move on a dime

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Highlights:

  • Monthly Q&A with Lane Hornung.
  • Low rates discussed.
  • Takeaway: Rates can move quickly.
Lane Hornung

Lane Hornung

This isn’t a news flash, but mortgage rates remain low.

Many consumers, however, may not be aware that at the end of July, for the first time in 2014, mortgage rates were lower than they were a year earlier.

A 30-year, fixed-rate at the end of July averaged 4.13 percent, compared with 4.37 percent in July 2013, according to Freddie Mac.

That doesn’t seem like much, but on a $300,000 mortgage, it drops the monthly principal and interest payment by $42.

For $40, you can buy a pretty nice dinner at many restaurants. And if you stayed in your house for 10 years, that is more than a $5,000 savings.

Low mortgage rates, and why consumers should care, is the subject of this month’s Q&A between Lane Hornung, founder and CEO of 8z Real Estate, and John Rebchook of InsideRealEstateNews.

John: Lane, many home buyers understandably focus on the price of a home. But how important are interest rates?

Lane: The rule of thumb is that every 1 percentage point change either increases or decreases your purchasing power by 10 percent.

So if rates rise by 1 percentage point, in order to keep your payments the same, you could afford a $270,000 mortgage and not a $300,000 mortgage.

The flip side is if rates fall by one percentage point, you could afford a $330,000 mortgage.

John: And rates can move on a dime, can’t they?

Lane: Interest rates move a lot faster than home prices. In economic terms, they say interest rates have a lot of elasticity (a measurement of how responsive an economic variable is to change). Home values, by contrast, are relatively inelastic.

Interest rates can rise a half point on one piece of news. That doesn’t happen frequently, but it’s not unprecedented. By contrast, it can take a few months for a home price to move even 0.5 percent.

John: Have we become spoiled by having rates so low for so long?

Lane: We are spoiled. One of the reasons is that over the past three years, the so-called experts have been guessing interest rates are going up. Truthfully, I was one of those so-called experts. I thought rates would be higher today than they are. So we are seen a bit like the little boy who cried wolf.

John: Rates, of course, are no longer at the unbelievably low rates available in 2012. I know some people who locked in 30-year fixed rates below 3 percent during that period.

Lane: Rates are off the absolute bottom. Without looking it up, I think they were bouncing around those record low levels for about four months. They are no longer in the 3.25 percent or 3.5 percent range. Instead, they have been in a really tight band in the 4 percent to 4.5 percent range for well over a year.

By the way, it’s important to remember that today’s rates are excellent by historical standards. Almost any other time in history, rates below 5 percent would be making headlines.

John: Thanks Lane.

8z Real Estate is a sponsor of InsideRealEstateNews.com along with Universal Lending Corp. and Land Title Guarantee Co. A monthly Q&A with Lane Hornung is a feature of IREN. Have a story idea or real estate tip? Contact John Rebchook at JRCHOOK@gmail.com. To read more articles by John Rebchook, subscribe to the Colorado Real Estate Journal.

 

 

 

 

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John Rebchook

John Rebchook has more than 30 years of experience in writing and communications. As the Real Estate Editor for the Rocky Mountain News, he wrote about residential and commercial real estate for 26 years. He has won numerous awards for business stories and columns that he wrote, both as an individual and part of teams. In addition to real estate, he also covered economic development, banking and financing, the airlines, and cable TV for the Rocky. In addition, he was one of the original freelance writers for GlobeSt.com, covering commercial real estate for the Internet publication.

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