Mortgage Interest Rates: 1 Big Reason to Buy a House Right Now

Low mortgage interest rates have made housing unusually affordable.

Aug 13, 2014 at 6:30PM


If you've been thinking about buying a house but are discouraged by rapidly inflating real-estate prices, then let me give you a reason to wait no more: Mortgage interest rates are still less than half the historical average.

Between 1971 and today, the average rate on a 30-year fixed-rate mortgage is 8.52%. Right now, according to Freddie Mac's primary mortgage market survey, it's at 4.14%.

Mortgage interest rates and home prices

I can't emphasize enough how significant this is. For instance, as I've discussed before, let's assume you purchase a $250,000 house with a 20% down payment and finance the rest with a 30-year fixed-rate mortgage.

At 4.15%, the total cost of the house (interest plus principal payments) is about $400,000. At 8.52%, by contrast, you'll end up paying a little more than $600,000.


My point is that mortgage interest rates matter as much as, if not more than, the actual cost of a house when all is said and done.

Mortgage interest rates and affordability

It's for this reason economists and housing-industry experts often refer to so-called "housing affordability," which factors in both interest rates and home prices to determine whether a typical American family can afford a median-priced home. And right now, at least from a historical standpoint, houses are still unusually affordable.

Since 1981, the National Association of Realtors' housing affordability index has averaged 124.8, meaning that a family with a median income has 24.8% more income than they need to afford a median-priced home. Today, the index is at 159.3!


Excepting the years immediately following the financial crisis, houses have never been as affordable as they are right now. And the reason is that mortgage interest rates are still ridiculously low.

Low mortgage interest rates won't last forever

This situation can't last, however. As you may recall, beginning last year, the Federal Reserve started to "taper" its monetary support for the economy.

What has happened since? Mortgage rates increased from 3.4% to 4.5% between the beginning and end of last year. And while they've since settled back down to the current 4.15%, they're ultimately bound to go higher.


Although it may not seem like it now, the economy will at some point improve in a substantive and sustainable way. And when it does, interest rates will respond in kind -- that is, they'll increase.

So, by lamenting the current trend in home prices, you may be missing the point that mortgage interest rates are the single most important variable when it comes to determining the total cost of homeownership.

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A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

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