U.S. mortgage rates plunged this month, sending borrowing costs for 30-year loans below four percent for the first time in 16 months.
The average rate for a 30-year fixed mortgage dropped to 3.97 percent, the lowest since June 2013. The average 15-year fixed rate fell to 3.18 percent. These figures came from a report released by Freddie Mac on October 16.
Earlier this year, when rates were about a point higher, Zillow Inc. estimated that, in the Chicago area, buying made more sense than renting IF you planned to live in the home for more than 2.3 years. With rates now even lower, that time frame will be even less.
According to Trulia’s recent Rent Versus Buy Report, it was 38 percent cheaper to buy a home rather than rent in the third quarter of 2014. Low mortgage rates and rising rent prices were cited as the causes behind the growing disparity between the costs of renting and buying.
“So, show me,” you might say. Okay. Let’s start with some assumptions.
Let’s assume you rent a new home for $2,100 per month. Let’s assume rents increase an average of 3 percent a year (a significantly lower annual increase than in the recent past). At the end of one year, your rent will increase to $2,163. By the fifth year, with the 3 percent annual increase, your rent will be $2,364 per month, by the 10th year, $2,740, by the 15th year, $3,176, and by the 30th year, $4,949. You probably also would be buying renter’s insurance.
Now, let’s assume that, instead of paying rent, you buy. Let’s say you buy a $350,000 home at Newport Cove. Assume your down payment is 10 percent and you lock in a 30-year mortgage with interest fixed at 3.97 percent.
Your monthly payment, including principal, interest, property taxes, home insurance and HOA fees, is estimated at $2,321 per month. This monthly payment will remain the same in the first year, the second year, through the 10th year and onto the 30th year. Moreover, these numbers do not account for the income tax savings you receive for deducting the interest and property taxes so, depending upon your tax bracket, after taxes your monthly payment may net out to be significantly less.
When you rent for 30 years, you have nothing to show for the dollars spent. But, when one is a homeowner for 30 years, at the end of that time, you have made a major investment. You own a house free and clear. No more mortgage payments. No rent.
Or, maybe your life is less “settled” and a move is in your far-off future. . . Then, you might consider an Adjustable Rate Mortgage. These mortgages are based typically on a 30-year term, and the monthly payments are FIXED for a certain number of years (5, 7 or 10 years). After that, the rate can adjust either up or down. Today one can secure a 5-year ARM loan at a 2.88 percent rate. On our example, that would calculate out to a monthly payment of $2,130 for principal, interest, property taxes, homeowners insurance and HOA fees. Plus, if you itemize deductions on your income tax, the interest and taxes are deductible, so your monthly outgo would ultimately be even less.
The experts continue to say that these low rates will not last, so it is very possible that, at this moment in time, houses are the most affordable they will ever be in our lives.