In the last year, mortgage interest rates have plummeted to historical lows. For anyone who has ever owned a home before, it’s no secret that interest rates are one of the most important variables when determining your buying power (how much home you actually can afford). When it comes to locking in a rate, a single percentage point can translate to tens of thousands of home value left on the table.
THE DIFFERENCE A PERCENTAGE POINT MAKES
Take a look at the table below which highlights how much house you can afford at a monthly payment of $1,750 (principal & interest only). The result is quite a contrast in home value as percentage points rise!
At a monthly payment budget of $1,750/mo and a 3% interest rate, you can get a house for about $518k, however with just a percentage point increase, you can only afford a $458k home. That’s almost a $60k difference in buying power from a single point increase! In addition, this means that at a 4% rate you pay over $61,000 extra versus the 3% rate in total loan payout over the 30 year life of the loan for a home of much lesser value.
WHAT THIS MEANS FOR BUYERS
From the example above, it’s not hard to see that low interest rates equate to HUGE savings. It also means that your buying power has just increased greatly bringing that once unaffordable house or those upgrades you once only dreamed of within your reach. What would you do with $60,000? A fireplace in the master, an outdoor kitchen, hot tub, lap pool and/or a chef’s kitchen? You get to decide!
Is cash really the best option?
Many of our residents are able to pay cash for their home. Although this is a very viable option for some, is it always the right one? That depends on your individual finances, for sure, but you may want to reconsider.
Your home is most likely one of your most valuable assets, but it’s important to keep in mind that it is not a liquid asset. Of course, you can take out a home equity loan, but if you needed cash fast for whatever reason, it’s simply not an option.
Also to consider is the stock market and other investments that might have a bigger return on your cash. This can be a bit of a gamble, but the gains can easily outweigh the risk.
WHAT IT MEANS FOR SELLERS
Just as you have more affordability with lower interest rates, so do other buyers, which in turn means good news if you’re selling a home. These favorable market conditions mean more buyers out there looking at your home creating more competition and putting you in a good position to make top dollar.
WILL THESE LOW RATES LAST?
Unfortunately, low interest rates will not last. Almost every economist agrees that with the $7 trillion stimulus our government recently spent for COVID-19 relief, inflation will rise. And when inflation rises, interest rates follow.
Parting Thoughts
It’s important to keep in mind that lower interest rates create favorable market conditions for ALL buyers and there will be plenty out looking, for sure. You can guarantee that smart buyers will be looking to get into their next home before rates fluctuate again. It’s never been a better time to purchase that home and the lifestyle you’ve waited for!