I recently had the opportunity to watch the movie Ghostbusters. It’s hard to believe that this movie is over 25 years old having been originally released in 1984. However, for those of us who saw it in the theaters when it was originally released there are some things that really date the movie.
For starters my eight year old had no idea who the Stay Puff Marshmallow man was, Dan Ackroyd was much thinner, Bill Murray was funny and they walk out of a bank have just secured a 19% home mortgage to start their Ghostbuster’s business. Yes, that is correct 19%. I know, only a mortgage banker would notice something like this but believe it or not these were the actual rates in the early 1980’s. Even more astounding was that the Prime Lending Rate was 20% (the rate home equity lines and credit cards are tied to).
I have always said that getting a great rate is a matter of perspective. When rates are bouncing between 18% and 17.5% and you are able to lock a 16.875% its natural to think you got a great rate. When I purchased my first home in 1989 I locked a 10.25% rate on a 10/1 ARM and was thrilled. 30 Year fixed rates were 12%. When I purchased my second home in 1999 I secured a Jumbo 30 year fixed rate at 6.25% and again thought I was brilliant since rates had been hovering a 7%. Today those rates sound crazy!
Today rates on a 30 year fixed rate conforming loan (under $417,000) are hovering between 4% and 4.25%. We have never seen this rate before on a 30 year fixed rate mortgage going all the way back to 1964 (the oldest chart I located).
So why are some home buyers waiting for lower rates?
Everybody is an optimist thinking rates are going lower …until they don’t. The bond market (which determines mortgage rates) can be fickle. The one thing it has taught us is that rates can go up much faster than they come down. Since everybody has a different tolerance to risk it is good to know what you are risking by waiting for rates to drop further. Many times people get hung up on the rate itself. After all 3.75% sounds so much better than 4% without realizing what this equates to in a monthly payment. For instance:
$250,000 Home Mortgage
4% rate for 30 year fixed
$1193.53 Monthly Principal and interest payment
3.75% rate for 30 year fixed
$1157.78 Monthly Principal and Interest Payment
You will save an additional $35.74 per month by waiting for a 3.75% rate. However if the market is volatile you may be risking as much as a .50% rate swing up which would cost an addition $73.18 per month over the 4.00% rate available today.
This volatility makes timing the bottom very difficult. One thing that can hedge your decision to lock is to find a lender that has a written float down policy so that if interest rates decline while you are in escrow you have the security of a locked rate with the opportunity to improve that rate should the market drop, taking the risk out of the situation for you.
I can’t help but wonder what we will all say in 2035 when we are watching an old movie and a character mentions just having secured a 4.00% rate on their home mortgage. Just how unbelievable will that sound?
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