What Do the Historic, Low Mortgage Rates Mean to Homebuyers?

If you have been watching the news lately, there is really not much good news in the economic front: The drop in the stock market, the downgrade by the S&P, the rise in unemployment claims, and the bad news from Europe…

As a realtor, I am anxious to see how the local housing market may react to the latest influx of bad news.

I do have buyers who are putting their plans on hold in light of the economic uncertainty, saying things like, “We are feeling a little bit uneasy to move up now.” 

And there are those whose down payment fund is tied to the stock market.

But don’t forget we do have a piece of good news—the nation’s mortgage rates remain at a historic low. I was actually surprised by the relatively lack of movement after the S&P downgrade two weeks ago.

But is the low mortgage rates alone enough to keep the local housing market going? If you’re contemplating buying or moving up, how much weight should you put on the interest-rate factor?

Obviously it depends on how comfortable you feel about your personal financial situation. But if you do plan to get a mortgage, like majority of homebuyers, a lower interest rate does translate into a smaller monthly mortgage payment.

Let’s start with some facts: In July, 31 out of 40 homes sold in Los Altos/Los Altos Hills had a lender involved. The size of the mortgage ranges from $300,000 to $2 million. Mortgages are obtained by buyers of all kind of homes, from entry level to high-end homes on the hills.

Now, look at some sample mortgage rates in recent days: 3.375% for a 15-year fixed-rate mortgage, equal or less than $417,000, or a little bit more at 3.5% if the loan is larger—up to $729,750. The rates are even lower, as low as 3% or under, for adjustable mortgages.

Punch the numbers and you’ll see the differences they make: For a 30-year, fixed-rate, $729,750 loan, a 1 percent drop in the interest rate translates into a saving of over $400 (or 10%+) per month.

If you are planning to obtain a sizeable mortgage, the historic low rates essentially allow you to buy a more expensive home with the same monthly payment.

Additionally, a sustained low-rate environment may eventually lead to a rise in home price when there are enough buyers motivated by the low interest rates to enter the market.

So what’s my advice, when the good news of low mortgage rates is being overshadowed by a wealth of bad news?

If you are comfortable with your financial situation and have a long-term horizon, the historic low rates do make now a good time to buy. Despite the recent rise in sales, the price level in Los Altos /Los Altos Hills remains stable, and is actually low compared to the pre-subprime crisis years. Just be sure that you’re not paying over the fair market value of the home, regardless of the market situation.

Personally, I do think there is enough confidence in the Los Altos /Los Altos Hills market to sustain the local demand.

While a seasonal retreat may be in the horizon, as suggested by the latest home sales report; the low mortgage rates certainly will help offset some of the negativities in the macro environment.

And as we have learned in the past few year, while the housing market does go up and down, homes in sought-after neighborhoods, like Los Altos /Los Altos Hills, continue to do better even in bad times.

Winnie Yip Fong, a Los Altos resident and a local realtor, writes a monthly column to provide advice and her insights into the local real estate market. Email her to winniefong.realestate@gmail.com for any suggestions or comments.