Should I buy a house because the rates are so low?

Home values have plummeted across the country.  Mortgage interest rates continue to hover between 4 and 5%, a historical low.  Both seem to suggest it’s a good time to buy a house.  So, is now the time to pull the trigger on a new mortgage?

There are a few things you should consider before you start looking for a house.  First, how comfortable would you be if you were to become “upside-down?”  That means you would owe more on the home than it’s actually worth. 

Property values continue to fall and there’s really nothing to indicate they will stabilize anytime soon.  Point being, you might be buying on the way down rather that at the bottom or even on the way up.  Today some 28% of homeowners are in that same position and trust me, most of them wish they weren’t. 

Second, don’t buy a house simply because the rates are low.  Too many people are focusing just on the interest rates and that's a bad idea.  Remember, when you borrow $250,000 to finance a home, you still owe someone $250,000.  Just because the loan has a very low interest rate doesn’t make you any less in debt than someone who has a horribly high interest rate. 

If you're going to buy a house then do so because you want the home, you love the neighborhood, the school district is good, or you're tired of renting. Don't do it just because the rates are low.  Think of the low rate as being the cherry on top, not the ice cream on the bottom.

Just because you’re hearing advertisements for incredibly low interest rates it certainly doesn’t mean that you’ll actually qualify for those rates.  You better have killer FICO credit scores and you better have them at all three of the credit reporting agencies.  Remember, mortgage lenders pull all three of your credit reports and all three of your FICO scores and then use the middle of your three scores on which to base their decision.  

And finally, you may have to pony up a 20% down payment to get those really low rates. The world of mortgage lending has changed dramatically since the end of 2007.  There are no more “liar loans” (when you would tell someone how much you made and nobody verified the accuracy).  There are no more “110 LTVs” (loan that were 110% of the appraised value of the home).  Sanity has worked it’s way back into the mortgage lending environment, which means better credit is required and income has to be, well, real income. 

This guest post was written by John Ulzheimer.  John is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.

Kim McGrigg is the former Manager of Community and Media Relations for MMI.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.