NEW YORK (MainStreet) When it comes to mortgages, everyone knows a low rate is better than a high one, because the interest charges are smaller. But there's another benefit that's often overlooked: A lower rate helps you build home equity faster.
It's another factor to consider in deciding whether to buy or refinance now or wait until later, when interest rates might be higher. If you're thinking of moving, for instance, it might be more convenient to hold off until next summer to move during the school break. But since rates could rise, moving sooner would allow you lock in the dual benefits of lower rates less interest and faster-growing equity.
Rates rose fairly substantially from spring through summer, with the typical 30-year fixed-rate loan going from about 3.5% in May to 4.75% in early September. The increase anticipated an economic recovery that would cause the Federal Reserve to eventually pull back on its policy of keeping rates low. But the Fed has postponed that move, and the rate has drifted down to about 4.5%.
That's awfully good by historical standards, as borrowers have often paid 7% or more. It seems highly unlikely we'll be back at 7% anytime soon, unless a Washington stalemate on budget talks leads to a debt default early next year.
But for the sake of argument, let's consider the difference between a $100,000 loan at 7% versus 4.5%.
The 7% loan would charge $665 per month, and you'd pay $139,500 in interest over 30 years. At 4.5%, the payment would be $507 and total interest $82,405. That's clearly a good reason to borrow when rates are low.
But what if you kept the loan for just 10 years, about average given the pace at which people move or refinance? The 7% loan would charge $65,665 in interest over that period, versus $40,891 for the 4.5% mortgage, a huge difference.