Cheap mortgage rates, low home prices offer chance of a lifetime

Five colorful houses in graduated sizes

You might never find a better time to buy a home, thanks to a combination of low prices, low inflation and incredibly cheap loans.

The average cost of every type of home loan we track has set new record lows this fall. Click here to find the results of our most recent weekly mortgage rate survey.

Find out how much home loans cost in your area by searching our extensive database of the best mortgage rates from hundreds of lenders.

Lenders in most markets are offering 30-year, fixed-rate home loans for as little as 4.125% with no points and application fees of less than $2,000. In some markets, you'll find rates as low as 4% or even 3.75%.

The principal and interest payments on such a home loan would be less than $500 a month for every $100,000 borrowed.

Use our mortgage calculator to see what your payments would be for any fixed-rate loan.

With home loan interest rate records falling multiple times this fall, you might be tempted to wait for even better deals if you're thinking about purchasing a home.

That could be a bad strategy.

A good gauge of your buying power is the Housing Affordability Index created by the National Association of Realtors. It measures the ability of a family with the median household's income to buy a median-priced home.

The index reached a record high earlier this year and continues to hover just short of that record high this fall.

"With current interest rates at or near an all-time low, home values also at all-time lows and inflation most likely increasing in the future, this may prove to be one of the best opportunities to invest in real estate that most of us will see in our lifetimes," says Gary Bussard, senior branch manager for Envoy Mortgage in St. Louis.

The key to coming out ahead, whether you're buying a home to live in or as a rental property, is to commit to the property as a long-term investment.

Flipping remains ill-advised, because it's tough to turn a quick profit on real estate when property values aren't rising.

We can't expect home values to rebound as long as millions of foreclosures a year are coming on the market -- and being sold at deep discounts.

That's why most experts say you should plan to hold any home you buy this fall for at least five to seven years, which should be long enough for the property to appreciate at least a little and allow you to break even on the sale.

"I would only suggest someone buy a house if they were reasonably sure they would live there at least 10 years," says St. Louis real estate consultant Paul Dribin. "All indications are that the housing market will be problematic for years."

No one knows what will happen with home prices or interest rates, but consider two plausible scenarios for buyers:

Let’s say that homes in your target neighborhood cost $200,000 on average.

If you bought a home today with a 20% down payment and took out a 30-year, fixed-rate loan at 4.125%, your monthly principal and interest payments would be $775 and your total borrowing costs over the life of the loan would be a little more than $119,000.

If you waited a year and home prices dropped 10%, that $200,000 house would cost $180,000 and a 20% down payment would mean that you were borrowing $144,000 instead of $160,000.

But if interest rates increased to 5.0% -- where they were just six months ago -- your monthly payments and borrowing costs would be virtually identical.

Waiting would save you nothing.

If home prices remain flat at $200,000 over the next year and interest rates increase to 5.25% -- roughly where they were in February -- your monthly payment would increase to $883 and the interest you would pay over the life of the loan would increase to about $158,000 -- $39,000 more.

What’s more, an increase in home prices or interest rates -- or both -- could prevent you from qualifying for a loan.

"Not everyone can buy a house now, but the real surprise might be when those who can today can't qualify for the same house in two years with higher rates," says broker Todd Huettner of Huettner Capital in Denver.

The Federal Reserve is taking steps to ensure that interest rates remain near today's record lows until at least next summer.

Between now and the end of June, the government-controlled bank will sell $400 billion worth of short-term Treasury bonds it owns and buy $400 billion worth of long-term government debt.

That should bid up the price and hold down the yield, which moves inversely to the price, on those long-term Treasury bonds.

Since home loans are just another type of long-term debt, the interest rate on home loans generally follow long-term Treasury rates up and down.

But after three years of almost nonstop efforts to drive interest rates down, most economists think this will be the last such intervention the Fed will attempt for awhile.

The moral of the story?

"Don't expect rates to be this low in two years," Huettner says.

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