Will 4.5 Percent Interest Rates Soon Become a Reality?

• December 17th 2008

by Mark Wellborn

It is now widely-known that the Treasury Department is considering a plan that would encourage banks to drop interest rates for new home loans to 4.5 percent, a full point lower than some of the lowest rates currently available for standard 30-year fixed-rate mortgages. Even though the plan is in its very early stages, just the talk that rates might drop to these historically low levels (and the fact that just yesterday the Federal Reserve cut its benchmark interest rate to almost zero) has gotten the attention of prospective home buyers. But with rates that are already lower than they have been in years (under 6 percent), does it make sense to wait for something that may never come?

“I think the people that are on the fence (to buy) are saying to themselves that they should wait to see if it actually happens,” Mandy Mills of Hounshell Real Estate told UrbanTurf. “People who are ready to buy are not waiting around.”

Mills’ partner David Getson was more emphatic.

“Quite frankly, I think the media is doing a general disservice to the market as a whole by putting the 4.5 percent number out there,” Getson said. “At this point, the details are very unclear, particularly who can actually qualify for the new rate.”

Getson is correct in that, at this point, very little is known about the program. However, the general perception is that the proposed plan will only help those who want to buy homes, not those who want to refinance. It is also thought that steady employment and a good credit history will be criteria that will be needed to qualify.

Let’s imagine for a moment that rates are cut to 4.5 percent. That means that if you put a 20 percent down payment on a $500,000 home, your loan payments will come to about $2,000 a month (assuming you get a 30-year fixed rate mortgage). Compare those payments with what you would be paying at 5.5 percent, and you are saving about $250 a month. Here are a few more monthly payment comparisons, based on a 30-year fixed rate mortgage:

Home Price	Loan (80%)	5.5 Percent	4.5 Percent	Monthly Savings
$250,000	$200,000	$1,135	$1,013	$122
$375,000	$300,000	$1,703	$1,520	$183
$625,000	$500,000	$2,838	$2,533	$305

While certainly enticing, these numbers could have the unfortunate result of people thinking that they can afford something they can’t. In other words, the low rates may tempt buyers to go one step above the property that they would’ve otherwise purchased. This is a dangerous leap in a time when layoffs are announced in the headlines daily and job security is so precarious. Besides, one of the reasons that the market is in the state that it is in is because consumers were biting off more of a mortgage than they could chew.

What’s more is that the plan is still in the discussion phase and may not be made final before the current administration’s term ends. This would mean that action would not be taken until Congress reconvenes next year. As such, the general consensus is that buyers who have their eyes set on a new home would be foolish to let it slip through their fingers for a rate that may never come. And 4.5 percent may indeed be too good to be true.

“I would love to see it get that low, but I am cautiously optimistic,” Leslie Wilder of McEnearney Associates told UrbanTurf. “I have a hard time seeing it happen.”

This article originally published at https://dc.urbanturf.com/articles/blog/will_4.5_percent_interest_rates_soon_become_a_reality/412.