Looks like Low Rates Will Be Here a Bit Longer

If you’re a homeowner, it looks like interest rates will stay low for at least the next year or so. According to a new Bank of Montreal economic study there isn’t a reason to expect higher rates anytime soon. That’s great news if you have a lot of debt, especially a mortgage or line of credit.

Right now, you can get around a 3% fixed five year mortgage. That’s incredibly low and worth taking advantage of. In a few years, when people are paying five to eight percent rates, you’ll look back and wonder how they every dropped this low.

Your credit card rates are insane anyway and a move in rates won’t impact them much. But you have to know that rates will rise and get back to some kind of historical averages. The place where that can become a real problem is with two really large debts that most people tend to carry: their mortgage and line of credit.

Lines of credit are set off prime rate, or prime plus one or two percent. They’ll change monthly so a change in interest rates will hit you immediately. And it’s likely that your balance is such that you can’t readily pay it off when rates do rise, so be carefully.

For your mortgage, low rates give you the opportunity to lock them in. If you’re up for renewal in the next year or so, you should really really consider a five year fixed term. That’s assuming you’re not moving in that time, that you’ll shop around, and don’t settle for the posted retail rates. Right now you can get close to a 3% fixed rate!

If you’re considering selling a low rate also helps the value of your home. Most people look at the payment they need to make more than the price of the house. Assuming they have a down-payment, and can afford $1,500 a month, the buyer can afford a purchase price of around $310,000. If your house is way above that, the buyer won’t qualify and can’t buy it. If rates move to 6%, that same buyer can now only afford a purchase price of around $235,000.

A three percent change in interest rates reduce what any buyer can afford by $75,000. That means fewer people can afford your home and it’s likely that prices will come down as fewer buyers can afford what’s out there. Your house hasn’t gone bad, it’s just that a prospective buyer can only qualify for the same payment, but that extra $75,000 goes towards interest and not the principal.

Gotta love the low rates if you’re a buyer or have a mortgage. But what goes down must come up.

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