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On Thursday, Aug. 24, Freddie Mac announced that the interest rate on the 30-year fixed-rate mortgage had risen to 7.23 percent. That’s the highest rate charged to borrowers since 2001. While that number is staggeringly higher than the 2.73 percent offered when rates hit their all-time low in February of 2021, it is a bargain when compared to the 18.5 percent borrowers were paying in October of 1981.Just as the Federal Reserve has been steadily increasing the cost of money to reduce the inflation that not long ago peaked at 9 percent, they applied the same strategy to combat the 14 percent inflation rate they were facing at the time. Although the nationwide median price of a home in Q-3 of 1981 was just $70,400, the challenges faced by buyers, sellers, lenders and Realtors were even more daunting than they are today.Some borrowers with the means, qualifications and burning desire to purchase did obtain 18.5 percent mortgages. Imagine being a homebuyer who borrowed $70,000 at that rate. Your monthly principal and interest payment would have been $1,084. Care to calculate the portion that went to pay the interest? The answer is $1,079, leaving a principal reduction of only $5.00. Not all buyers were willing or able to afford the prevailing rates, however, so they purchased utilizing a bit of creative financing.Gary SandlerAt the time, due on sale clauses were unenforceable. A due on sale clause allows the lender to call due the entire loan balance if the borrower transfers title to the property without paying off the mortgage. Between 1979 and 1981, courts determined that the clauses were enforceable but only against mortgages that were originated after the dates of the courts’ determinations, which meant that loans originated prior to the decisions could be assumed without fear of the loan being called due.Both buyers and sellers took advantage of the opportunity. For example, let’s say a buyer offered to purchase a home for $100,000. Let’s also say the current owner owed $60,000 on his mortgage. A common scenario would find the buyer giving the seller a $10,000 downpayment, taking out a second mortgage of $30,000 at 19 or 20 percent, and assuming the seller’s $60,000 mortgage at 7 or 8 percent. If the blended rate on both loans did not exceed 10 to12 percent, everyone would hurry up and sign before somebody changed their mind. Buyers would then send a letter to the former owner’s lender, informing them that they are the new owner and instructing them to send a new payment book in their name.Story continues2023 interest ratesToday’s higher rates are zapping the purchasing power of everyone who finances a home, forcing them to purchase in lower price ranges. Take for example the buyer who could qualify for a $350,000 mortgage when the rate was 2.73 percent. His or her monthly principal and interest payment would have been $1,425. At today’s 7.23 rate, that same $1,475 payment will only support a mortgage of $216,600, a loss of $133,400 in buying power. And, by the way, today’s P&I payment on that $350,000 loan at 7.23 percent would be $2,383.In order for that same buyer to qualify for the $908 difference in the payment ($2,383 v $1,425), he or she would have to earn an additional $3000 per month.See you at closing!Gary Sandler is a full-time Realtor and president of Gary Sandler Inc., Realtors in Las Cruces, New Mexico. He loves to answer questions and can be reached at 575-642-2292 or Gary@GarySandler.com.This article originally appeared on Las Cruces Sun-News: Today’s mortgage rates are a bargain compared with their all-time high
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