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Preparing to Buy a Home? Keep Interest Rates in Perspective
By Philip Burum
This autumn started out with good news for home buyers when Bankrate.com reported that the 30 Year Fixed Mortgage Interest Rate (FRM) posted at 3.92 percent with other rates such as the 15 Year Fixed and 5/1 Adjustable Rate Mortgage (ARN) all still hovering below four percent. These are among the lowest mortgage interest rates in history. Yet interest rates are just one of many factors that homeowners and homebuyers should consider when shopping for a new home – and may be of less importance than expected when one weighs them against other benefits of homeownership.
Since the data has been reliably collected and reported, beginning in the 1950’s, home values nationally have increased by an average of more than six percent annually. National and global economic conditions will reduce or increase that amount in any given year and individual markets will vary greatly as they are impacted by events and occurrences in the immediate areas.
For example, new development, new services or businesses tend to increase values beyond regional and national averages while increased crime rates or closing of business and loss of services will tend to reduce home values outside of normal patterns.
With a reasonable expectation that home values will appreciate six percent annually, you might better understand that making the decision not to purchase a home based on a fluctuation of a half point in the interest rates is what the great English author Robert Burton meant by being “penny wise and pound foolish”.
The projected increase in value is all too often overlooked in the mathematical equation regarding a decision to buy. Calculate the difference in monthly payments and down payment needs based on a five percent or even 0.1 percent rise or reduction in interest rates when coupled with the reasonable expectation of six percent appreciation in values – you will find that waiting another year will cost you in the short and long term.
Then, factor in the tax advantages from deductions for the interest on mortgage loans and real estate taxes to capital gains exclusions for sales of a principle residence; these tax benefits are available only to homeowners.
Consider too that homeownership offers a vast array of benefits that can’t be measured in dollars. In the Harvard University’s Joint Center for Housing Studies’ “The Impact of Homeownership on Child Outcomes”, children of homeowners are more likely to do well in school and be more successful as adults. The study found that “children of homeowners have better home environments, higher cognitive test scores and fewer behavior problems”.
The study found that homeownership leads to a 13 to 23 percent higher quality home environment and the “independent impact of homeownership combined with its positive impact on the home environment results in the children of homeowners achieving math scores up to nine percent higher and reading scores up to seven percent higher with reductions in children’s’ behavior problems of up to three percent”.
When the Center analyzed the reasons for those results. It found that one of the biggest reasons children of homeowners have greater advantages in education is because homeowners tend to be more stable. The average homeowner stays in their homes about eight years while renters tend to relocate far more frequently. In addition, the Center’s “The State of the Nation’s Housing Crisis” released last year stated that stability in communities results in a greater chance that a child will attend college and have higher lifetime earnings.
Moderate changes to the 30-year interest rate should not impact your decision to buy unless the impact is to motivate you to buy sooner than later. Do not let the opportunity to own your own home pass based on the misconception that modest adjustments in the mortgage rates have a dramatic effect on the financing of your American Dream of Homeownership.