Good Morning Green Panda Friends! The second post in our Leasing vs. Buying series discusses the Pros and Cons of Buying a Home versus the Pros and Cons of Leasing an Apartment. We may want to buy our first home because we want our own space, or we may want to buy our first home because we feel that buying real estate is a good investment. Some of the richest people in the world invest in real estate, but when we consider the fluctuations in mortgage rates is buying a home a really good investment?
Mortgage Rate Trends and Paying Off Our Mortgage Quicker
When mortgage interest rates are low, buying a home is a good investment because we get more for our money. When interest rates dropped significantly in 2008 and 2009 I had a lot of clients who were upgrading their homes. They would apply for a bigger mortgage loan and with the low mortgage rate trend their payments would be the same (and in some cases lower) than they were before.
When interest rates are low we can pay off our mortgage quicker because more of our mortgage payment is allocated to the capital. When interest rates are high the majority of our mortgage payment is being allocated to interest, and we aren’t paying off our capital mortgage loan.
For the purposes of this example we used the RBC Mortgage Payment Calculator to show the benefits of a lower mortgage rate on a $225,000 Mortgage Loan. The Mortgage Loan has a 15 year fixed rate and a 30 year amortization.
At a fixed rate of 4.25% our monthly mortgage payment will be $1101.98.
At a fixed rate of 3.75% our monthly mortgage payment will be $1038.32
Choosing biweekly mortgage payments instead of monthly mortgage payments will significantly help pay off our mortgage quicker and save on interest costs. Whenever we save on interest costs buying a home is a good investment.
When is Buying a Home a Good Investment?
When mortgage rates are low it is a “Buyers Market”. People want to buy homes when the cost is lower because they are getting a good deal. If mortgage rates are low property values could also be low; this makes buying a home an even better investment for homebuyers. The number one rule of investing is buy low and sell high.
When mortgage rate trends are increasing, property values are also high and it is a “Sellers Market”. During a Seller’s Market is not an ideal time to buy a home because the seller has the advantage since property values are high. When property values are high buyers could end up overpaying for their home. However, some people say that buying real estate is always a good investment.
Mortgage Rate Fluctuations Depend on Prime Rate
Fluctuations in mortgage rate trends can make buying a home a risky investment. However, fluctuations in mortgage rates can also make having a home a risky investment. Over the past few years we have experienced our share of fluctuations in mortgage rates. Financial institutions base their mortgage rates on Prime Rate. The current US Prime Rate is 3.25%, and the current Canadian Prime Rate is 3.0%. As the Federal Banks increase and decrease Prime Rate, Financial Institutions will also adjust their mortgage rates accordingly.
Here is a Brief History of Prime Rate and Historical Mortgage Rates:
Year Prime Rate 15 Year Mortgage Rate (as per HSH)
Dec 1995 8.5% 7.05%
May 2000 9.5% 8.40%
Feb 2005 5.5% 5.26%
Apr 2011 3.25% 4.125%
There are pros and cons to both leasing an apartment as well as buying a home. When we finally take the big first step and decide that buying a home is a good investment, we will then have to pick the right house for us. Happy House Hunting Everyone!
Photo by Lavocado
Tahnya is 30 years old and lives in Montreal Quebec. She graduated in 2005 from Concordia University, and she currently works for a major International Financial Institution. She recently launched http://www.mediamadam.ca/. You can follow her on Twitter @TahnyaP.