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Low ratesThis is the next post in my series discussing why many in the Millennial generation really can afford to purchase a home in the Dayton, Ohio area. My previous post discussed the pros and cons of owning versus renting, and explained that there are situations in which it is cheaper to buy. In this post, I will be discussing mortgage rates, and how Millennials can still take advantage of historically low rates- but if they wait too long, they will miss the boat.

Sometimes it can feel like the Millennial generation got the short end of the stick. Many of us graduated college into a crappy job market, the cost of college has skyrocketed, graduation resulted in a mountain of student loan debt, and rent costs have continued to rise all over the country. But there is one opportunity that the younger generation can still take advantage of, and that is the current mortgage rates that are available. As of this week, the mortgage rate for a 30-year fixed rate is around 4.42%. A year ago, it was at 4.08%. The current rates are still considered ‘historically low,’ but that isn’t going to last forever. And by that, I mean, rates are going to steadily climb over the next couple years.

If you are a normal person, who is not in the real estate or banking profession, you probably don’t pay a ton of attention to mortgage rates. Maybe you have vaguely heard the term on the news, or seen headlines as you scroll through the news feed on your phone. You might be wondering what’s the big deal about mortgage rates, and why people keep talking about how low they are So here is a brief history lesson.

Today’s low mortgage rates are a product of the housing crisis – and rates will rise as the economy recovers

You may remember, that in 2008, the United States had “the housing crisis.” At that time, a record number of people defaulted on their home loans. Not only was this terrible for the individuals who lost their homes, but this led to a greater catastrophe on Wall Street. Banks and financial institutions were buying loans, ‘packaging’ them into a type of investment product, and selling them. When homeowners defaulted, these ‘financial products’ ended up being basically worthless. Banks suddenly had a big problem. One, they were holding a bunch of bad loans. Two, investors were losing confidence quickly, and there was a huge fear that banking consumers would begin to withdraw their money from the banks. One of the major banks of the day, Lehman Brothers, went bankrupt, and a whole bunch of others were on the verge. The government had to swoop in and ensure that all of our financial institutions didn’t go down in flames, so they loaned all of the big banks that were still standing money, in hopes that they would continue to do business. (This is where the term ‘Too Big to Fail’ comes from).

After the dust settled a whole heap of new regulations came in. Before 2008, lending regulations were, shall we say, loose. NINJA loans were easy to get – as in No Income, No Job, No Assets. After everything fell apart, the underwriting process for a loan became more stringent, the minimum credit score needed to obtain a mortgage loan was increased, borrowers needed proof of income, etc.

Now, in order for the economy to run properly, banks have to loan out money. If investors, home buyers, consumers, etc., do not have access to money through leverage, the economy falls apart. So the Federal Reserve had to do some fancy manipulating to stabilize the housing market and inspire confidence in the economy. They lowered short term interest rates to nearly 0%, and purchased long-term securities themselves. The goal was to continue to do this until unemployment levels declined, the backlog of foreclosures was reduced, and construction was back underway. This resulted in the nice, low mortgage rates that we enjoy today. However, ten years have now passed, unemployment is down, and the Fed is worried about inflation. This means that our ultra low mortgage rate party is about to come to an end, for those in Dayton and elsewhere.

Even relatively small differences in a mortgage rate can have an impact on a Dayton buyer’s purchasing power

So when we say that mortgage rates are going to ‘rise’ you are probably asking yourself, how high can they go? Well, in the past 30 years, there has been a wide range in rates. In 1982, the average mortgage rate reached its historical peak at 16.82%. By 1990, the average mortgage rate had come down to 10.13%. And then from 2000-2008, average rates fluctuated anywhere from 6-8%.

So how high will mortgage rates go this time? No one person can predict that for certain. But what we do know for a fact is that the Federal Reserve Chairman has stated before Congress that he feels positive about the economy, that he is concerned with rising inflation, and that the central bank will continue to make several rate hikes this year. And we know that in the last 30 years, the average mortgage rate had never gotten below 5% until 2010.This means that, based on historical norms, we can count on rates to be at least 5%.

So now you are probably asking, how big of a difference does my mortgage rate really make? The answer is a big difference. For example, suppose that a buyer wants to take out a $100,000 loan, and wants a 30 year fixed rate. If the interest rate is 4.0%, the borrower would have a monthly payment of $477. If the interest rate goes up .5% to 4.5%, the payment would become $507. That’s a $30 difference, based on half a percent! Now, let’s say the rate jumps to 6%. For the same house the monthly rate would become $600. That’s a $123 difference between the 4% rate and the 6% rage.

For a lot of borrowers, that rate hike could make the difference between whether or not they qualify for a loan. As rates rise, borrowers will be approved for lower amounts than they are today, meaning that their housing options will become more limited. It also means that the same house will cost more, even if the price doesn’t go up.

That’s why I am urging Millennials who think they will buy their first house ‘someday’ to consider moving up that date. Rates are steadily on the rise, and 2018 might be the last chance to lock in an ultra low rate. If you are a first time home buyer and are on the fence about whether or not purchasing a home is for you, contact a Realtor and discuss your options. As a real estate agent, I assist home buyers looking for homes in Dayton, Beavercreek, Centerville, Cincinnati, Clayton, Englewood, Oakwood, Fairborn, Harrison Township, Huber Heights, Kettering, Miami Township, Miamisburg, Riverside, Springboro, Trotwood, Vandalia, Washington Township, West Carrollton, and Xenia.