Interest Rates: Why tiny little numbers mean big bucks lost

Let's take a quiz: Which is the better deal?

1. Buy a home today.
2. Wait a month for the seller to "loosen up" and buy the exact same home for $10,000 less?

Answer: Unless you're paying cash, you cannot answer without knowing the mortgage interest rate.

That's right. SAVING $10,000 dollars on a home might COST you big bucks if mortgage rates go up even a tiny little bit in the meantime.

To be specific: Let's say you, like most people, are planning to take a 30-year fixed-rate mortgage to buy the home. If you needed a $150,000 mortgage to buy that home, and interest rates increased just 00.3% while you waited, you would pay about $10,000 in extra interest - basically wiping out the $10,000 "savings" you got.

If you were borrowing more than $150,000 - then it would be even worse. You'd actually 'lose' money - you would pay more in extra interest than you saved by waiting. Alternately, if rates went up MORE than 00.3% while you "waited for a better price" - then it would be even worse. If you were borrowing more than $150,000 AND rates went up more than 00.3%, it could get scary fast!

We've all grown used to one of the few silver linings of a weak economic period: low mortgage rates. So why think about rates going up? Because a lot of signs point to an economy in recovery, which may likely lead to higher mortgage rates:

• Both housing prices AND mortgage rates are at historic lows. This 'perfect storm' convergence is unlikely to last.
• The stock market has been on a strong "bull run" rise: The Dow Jones Average just hit 10,000 again for the first time in over a year. The S&P 500 is closing in on 1,100.
• Foreclosures have slowed in hard-hit areas like Florida, Nevada and California (and never actually got that high to start with in other areas, such as Central Pennsylvania)
• Unemployment rates seem to have stabilized, layoffs have slowed and job creation is up.
• Financial companies considered "nearly dead" a year ago are making comebacks: From a stock price under $1.00 and talk of collapse, Citibank is not trading near $5.00 and has shown profit 2 of the last three quarters.

Bear in mind - there doesn't need to be a fast and hot recovery in progress for you to lose out. There doesn't have to be a big resurgence in jobs, large drops in unemployment, or other "big" changes. All it takes is a few indicators of recovery and a few tenths-of-a-percent in mortgage rate increases for you to lose money by waiting - and remember, that's EVEN if you get a "better" price. Like the headline says: where mortgage rates are concerned, "tiny little numbers can mean big bucks lost."

But here's the good news: If you wait to buy and rates go up, you're stuck. But if you buy now and rates go DOWN - then you can refinance and get the lower rate anyhow!

And the real secret behind it all? Always remember it may NOT be "free" to wait: ALWAYS consider the possible costs of higher interest rates when making a decision.