Low Interest Rates Bad Excuse For Buying Too Much House

ROCKVILLE, MD. ––“Record-low interest rates can be a blessing or a curse to new home buyers,” said Steve Rhode, president of Myvesta, a financial health center. “For people who use interest rates to keep their payments low, it's a great time to buy or refinance. However, more and more people are using the low rates to pump up the size of their new home and, subsequently, the monthly payment.” According the Federal Reserve, housing payments are taking up a record-setting percentage of people's paychecks.

 “Doubling the size of your mortgage will double the size of your payment, too,” Mr Rhode said. The monthly payment for a 30-year, 6.5 percent, fixed-rate mortgage of $100,000 is $632.07. A $200,000 mortgage with the same parameters has a monthly payment of $1,264.14.

“Low interest rates lure people into thinking they can get bigger and bigger houses. However, a big monthly payment can be a noose around their necks if they hit a financial bump,” he said.

“Many people are in serious debt trouble because they buy too much house for their income," Mr Rhode said. “The last thing they want to hear is that they should move into a less expensive home. But in many cases it's necessary for people to downsize their homes to make ends meet.”

He added, “Fixed- and adjustable-rate mortgages are close to 30-year lows. People who have financial problems, combined with adjustable rate mortgages, have the highest risk of losing their homes. Because their monthly payments rise along with the interest, home shoppers who choose an adjustable-rate mortgage should base their home price on the highest possible monthly payment so they have a cushion against hard times.”

Mr Rhode cautions that lenders are in the business of making loans, so they will try to qualify borrowers for the largest mortgage their formulas will allow. “Just because a lender qualifies you for a certain amount, doesn't always mean it's affordable for you,” he notes.

People who are shopping for homes should look for loans they can afford over the long term, he said. “With a low monthly payment, they will be able to furnish their new homes and live comfortably, without being set up for future financial problems.”