Home Buyers: Keep Your Eyes on Both Prices and Mortgage Rates

By Richard Barrington
NFNS Columnist

Shrewd shoppers love a bargain, so it is natural for some prospective home buyers to sit back and wait as home prices fall. Certainly, the end of the housing bubble is good news for new buyers, and prices may have a long way to go before they stop falling. Still, it doesn't pay to be too passive, and prospective home buyers should be eyeing both falling prices and falling mortgage rates for an opportunity to jump into the market.

Mortgage Rates and New Home Loans

When buyers start sizing up the housing market, one of the first things they figure out is what price they can afford to pay. From that point on, this target price remains a focal point of most searches.

The fact is, the target price is a moving target, because it is only one component of how affordable your new home loan will be. The other component, of course, is interest rates. Instead of focusing so much on price, prospective buyers would do well to figure out what monthly new home loan payment they can afford.

Since this new home loan payment is a function of both price and mortgage rates, as mortgage rates fall, the target home price can afford to rise, giving the buyer more latitude.

Refinancing Activity: An Indicator of Falling Rates

One clue that mortgage rates are at relatively low levels is that refinancing activity has perked up. For all the news about the troubled mortgage market, mortgage applications have been at high levels lately, and much of this is driven by refinancing activity. While there can be other reasons for refinancing, as a general rule refinancing activity increases when mortgage rates have experienced a significant drop.

If prospective buyers factor in both falling home prices and falling mortgage rates, what they are likely to find in the current market is that the new home loan they can afford will buy them more house than they had previously thought.

Mortgage Bankers Association

About the Author:
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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