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Ask the Expert: Interest Rates Are Low! Should I Buy a Home?

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It’s January 2013 and mortgage interest rates continue to hover down near historic lows. For consumers with FICO scores around 750 and above, the rates are in the low three percent neighborhood. That begs the question, “Should I be a home buyer in this market given that interest rates are so low?”

It’s a fact that mortgage money is very inexpensive. In fact, save for a few auto lending deals offered by the captives and the best introductory rates on credit cards, today’s mortgage rates represent the cheapest money in consumer lending. If you’re sitting on the fence waiting for rates to go lower, you’re rolling the dice and could see rates move against you. If the cost of funds is your focal point—pull the trigger.

For those of you who choose to buy a house, especially first time homeowners, recognize that mortgage debt is very different than any other type of debt. Mortgage debt means property taxes, homeowners insurance, utilities, sewage and garbage fees, mowing lawns, leaking roofs, and all of the other goodies that go along with being a homeowner. It also means the largest debt you’ll ever carry, in both size and length.

Getting into $250,000 of debt is intimidating, even with a great interest rate. If you financed $250,000 for 30 years at 3.5 percent you would be required to make a principal and interest (P+I) payment of $1,122 for 360 consecutive months. That monthly payment doesn’t include escrow impounds for property taxes or homeowner’s insurance. You can add several hundred dollars to that payment, each month, to cover those expenses.

Point being: Getting into mortgage debt is still getting into debt—albeit cheap debt, comparatively speaking. And because debt is debt, I’d never advise someone to buy a house simply because the rates on mortgages are attractive. If you’re going to choose to buy a home do so because you’ve found a wise investment, or the house is in a good school district and your kids are in school, or because you’re sick of renting. Those are all great reasons to buy a house, but “because it’s cheap debt” is not.

Impact on Credit Scores

When you close on your mortgage loan and take possession of the home it’s only a matter of time until the debt will likely show up on your credit reports. You might be surprised to learn, however, that mortgage debt has a very small impact on your credit scores. This is counter-intuitive given the fact that the balance on your mortgage loan is likely many times higher than the balance on any of your liabilities.

Notwithstanding the current mortgage environment, which is atypical, mortgage loans tend to be very stable with low default rates. Traditionally consumers who found themselves in financial stress would let credit card balances go into default before they’d let their home or auto loans go into default. The reason? You need a place to live and you need a way to get around.

I’ll give you a personal example that quantifies just how little mortgage debt matters to your credit scores. A few years ago I sold and paid off a $249,000 mortgage loan by selling the house. I was curiously waiting for the debt to be updated to $0 on my credit reports so I could see how my credit scores reacted. My credit score went up 4 points.  As such, don’t let “because it will hurt my credit scores” be the reason you do not buy a home.

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