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Save America – buy a home!

Butch Elich andPaul ParkerWelcome Home

Mortgage interest rates remain the lowest in years, and if you are in a position to buy something that requires a loan, a house for instance … this is definitely the time. We subscribe to a news feed, “Realty Times News and Advice,” and the following information comes, in part, from their recent article, “How Mortgage Rates Compare.” The full content can be found on our website, but we thought it would be fun to point out a few basics about mortgage interest and the economic effect of rates on the economy.Several factors cause interest rates to vary. According to the Federal Reserve Bank of New York, “Lower interest rates make it easier for people to borrow in order to buy cars and homes. Purchases of homes, in turn, increase the demand for other items, such as furniture and appliances, thus providing an additional boost to the economy. Lower interest rates mean that consumers spend less on interest costs, leaving them with more of their income to spend on goods and services.”This is, after all, what drives the economy – spending.The Fed continues, “If the rates that consumers and businesses have to pay to borrow rise too rapidly, spending may decline, leading to an economic slowdown.” This means, in our current economic climate, that until people start to spend, interest rates will probably stay low. It’s a double-edged, which-came-first, win-win, or you-can’t-win-them-all, proposition. The economy needs spending to grow, but rising interest rates cause spending to slow. Hey, that rhymes!Striking a balance is tricky, and probably keeps Timothy Geithner awake at night. Guiding the greater economy, using the game pieces of interest rates vs. consumer spending, together with employment, is a tricky game of chess. Sometimes, it would seem that the pieces move all by themselves, as if by magic, but the Fed and is on one side of the chess board, and we, the consumers, are the opponent. The response to a move on one side governs the decisions on the other. Right now, buyers who need loans are in a position to win, especially if those buyers are getting ahead at work (see last paragraph).Thirty years ago, Freddie Mac reports that the 30-year fixed rate mortgage hit a staggering 16.32 percent. Today’s interest rate averages about 4.5 percent. Basically, a 30-year fixed-rate mortgage for $100,000 at 16.32 percent, would have cost around $1,450 a month. That same mortgage at today’s rate would cost about $580 a month. I’m sure you can do the math, but that’s a savings of $870 per month, or $10,440 per year! Enough, all other things being equal, to purchase 2.5 $100,000 homes. By comparison, today you could be an investor, rather than a first-time home buyer. In fact, folks who did buy during those high-interest days benefited by systematically refinancing. As rates came down, they turned interest savings into new purchases, either in more real estate or in other segments of the economy. This, in part, is what drove the last 30 years of consumer spending and booming economy – the reallocation, if you will, of interest spending into spending on other stuff.So, buyers in a position to purchase should do it now, and thus become part of the solution that our economy needs. You could be the one who saves the day! By making a real estate purchase with a long term loan at a historically low rate, those who buy now will reap the benefit of having more income to “spend” as other indicators improve. Just think, if and when you get a raise (because you’re getting ahead at work) you can use it to pay for something other than interest and help to drive the economy!Welcome Home is written by Butch Elich & Paula Parker. Ssearch for them by name on Google, Twitter, or Facebook.


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