If you’re new to the housing market, take my word for it: Today’s interest rates are eye-poppingly low. A 3o-year fixed rate mortgage at 3.44%? A 15-year fixed rate mortgage at 2.83%? (Figures from Bankrate.com.) No, don’t take my word for it: The press is calling these “record lows.” As in, record for all of U.S. history. Even back when Grandpa was buying an ice cream cone for a quarter, his family was probably paying 7% on their mortgage.
If you’re in the market to buy a home, just sit back and enjoy. Or if you’d like to gloat, play with some online calculators and realize how much interest you’ll be saving over the life of the loan as compared with people who bought houses just a few years ago.
Using Bankrate’s “Mortgage Calculator,” for instance, I plugged in numbers for a 30-year fixed rate loan on a $250,000 house at 3.5% interest; and then the same loan at 6.5% interest. (Be sure to press the “Show/Recalculate Amortization Table” for a full rundown of interest payments and totals.) With the first loan at 3.5% you’d pay $154,140 over the life of the loan. (Gulp. Really, when you add it all up, even the lowest-interest mortgage results in a big pile of cash handed over to the lender.)
Now let’s look at the same loan at 6.5%. Total interest = $318,861. That’s a difference of $164,721. With figures like that, homebuyers today can afford a lot more house than they will be able to when interest rates rise again. (And there’s little doubt that they will, someday.)
If you already own a home, now’s a good time to think about refinancing — or perhaps even re-refinancing. But run some numbers on that first, too. You can do so using Nolo’s Refinance Calculator. The upfront costs of getting a new loan sometimes wipe out the savings. The key is to find your “breakeven point,” indicating how long it will take you to work off the initial closing costs by saving money on interest each month. If you expect to stay in your home for less time than it takes to reach your breakeven point, the refinance definitely isn’t worth it.