Rising home prices add a new twist for mortgage calculators

December 10th, 2012

If you are planning to buy a house, you may be keeping a wary eye on mortgage rates, hoping they don't rise before you can get into the market. However, for the first time in years, it might be housing prices that bear more careful watching.

Mortgage rates hold steady

Mortgage rates ticked up by one basis point at the end of November; but at 3.32 percent, 30-year mortgage rates remained near their record low. The bigger picture is that those rates stayed under 3.5 percent for all of October and November, giving prospective home buyers a stable environment in which to make plans.

If you run mortgage rates that differ by a few basis points through a mortgage payment calculator, you'll find that it has a negligible effect on the monthly payments you would be facing. However, recent moves in housing prices could make much more of a difference.

Housing prices start to climb

According to the S&P/Case-Shiller Home Price Indices, average US home prices were up by 3.6 percent from the third quarter of 2011 through the third quarter of 2012. That's a fairly modest increase, and like a few basis points' change in interest rates, wouldn't yield a radically different result from a mortgage payment calculator. However, September of 2012 represented the sixth consecutive month in which home prices rose. This rising trend is even stronger in some markets.

For 12 months ending in September, home prices were up by 20.4 percent in Phoenix, 8.8 percent in Minneapolis, and 7.6 percent in Detroit. Changes of that magnitude could materially affect the results you get from a mortgage payment calculator, and thus change your home buying plans.

Housing prices have been down so long that it may be tempting to take their low levels for granted, but remember: less than a decade ago rapidly rising prices made people feel desperate to get into the housing market, fearful that they would never get the opportunity to afford a house.

As you make your plans now, while you may run the numbers on a mortgage calculator, remember that it's not just the mortgage rate that will affect the outcome of your calculations. In recent months, it has been home prices that have been the moving target for prospective home buyers.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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