By Carlos Siderman Property I.D. Corporation
The U.S. government announced yesterday in the news that mortgage rates may fall to their lowest since World War II on the Federal Reserve's plan to buy up to $300 billion of Treasuries and increase their purchases of mortgage-backed bonds. Rates for 30-year fixed home loans dropped below 5 percent this week. In 1945 the average mortgage rate was 4.7 percent. The Fed is trying to lower rates by reducing the supply of outstanding mortgage bonds, boosting their price and lowering yields. That would allow banks to reduce the rates on new mortgages and still sell mortgage securities at a profit.
When the Fed announced in the latter part of 2008 that through a program they will be buying $500 billion of mortgage-backed securities guaranteed by Fannie and Freddie, the 30-year fixed mortgage rates went down below 5 percent which is the lowest since Freddie Mac began keeping track in 1971.
This week, the Fed announced that U.S. central bankers will buy up to an additional $750 billion of mortgage-backed securities from Freddie Mac, Fannie Mae increasing support to home lending. The Fed's plan to buy additional mortgage bonds would increase its purchasing commitment to as much as $1.25 trillion.
The Federal Open Market Committee said in a news statement in Washington that "this action is to provide greater support to mortgage lending and housing markets".
What do these translate into dollars and cents?
Mortgage $200,000 rate 7% monthly payment $1,330.60
Mortgage $200,000 rate 6% monthly payment $1,199.10
Mortgage $200,000 rate 5% monthly payment $1,073.64
The difference on a $200,000 mortgage from the recent past rate of 7 percent and the new 5 percent is $256.96 per month. If we have this difference available to us for the mortgage payment every month, we can shop for a home mortgage that is 46.25% larger which is equivalent to a mortgage of $292,505.60
Why? When we applied the $256.96 per month difference to the capital the net result is that we can afford a $292,505.60 mortgage instead of the $200,000 one.
A mortgage rate is one, if not the most, significant factor in buying a house and it helps you analyze your purchase ability. With the rates below the 5% mark, combined with the generous inventory and incentivized sellers, we are in the midst of the best possible home buying market today.
It is my opinion that these market conditions provide an unusual and rare opportunity to own real estate. Remember, when you read it in the newspapers it's because is too late. Carlos Siderman is the president of Property ID Corporation founder of the natural hazards disclosure industry and California real estate information company.