Mortgage rates have been historically low for years, and every indication is that they are here to stay for the foreseeable future. But the low rates won’t last forever, so homebuyers, real estate investors and homeowners who want to strengthen their finances should consider how they can benefit before rates rise.
While interest rates shouldn’t be your only consideration when shopping for a home, even small fluctuations in the rate can affect your monthly payment, the overall amount of interest you’ll pay over the life of the loan and your buying power. A lower interest rate can potentially enable a buyer to purchase a larger house or a home in better condition. More purchasing power is particularly important in a high-cost housing market.
How much is a percentage point worth on your mortgage
Consider this scenario: If you’re a first-time homebuyer and are comfortable with a monthly principal and interest payment of $1,075, an interest rate change of 1% can make a huge difference in how much you can afford—as much as $25,000. At 4% (4.169% APR), your monthly payment of $1,074.20 covers a mortgage of $225,000 for a purchase price of $281,250 with a 20% down payment. At 5% (5.096% APR), your monthly payment of $1,073.66 covers a mortgage of $200,000 and a purchase price of $250,000 with a 20% down payment.
Today’s rates are right around 3%, potentially increasing your buying power. Keep in mind that these examples don’t include property taxes, homeowner’s insurance and other potential costs, such as homeowner’s association dues.
For move-up buyers who already have a low mortgage rate, continued low rates open a window of opportunity to move into a new home with a loan at a comparable rate. For example, buyers who want to keep their monthly mortgage payment to about $2,600 can afford a loan of $500,000 at a mortgage rate of 4.75% (4.907% APR). If rates rise to 5% (5.75% APR), that payment would cover a loan of $445,000 – a difference of $55,000.
Real estate investors tend to focus more on cash flow than mortgage rates. But when mortgage rates are low, they can benefit from lower payments, which could offset high property prices.
Homeowners who want to stay in their homes can look at a variety of refinancing options depending on their goals. If they want to pay off their home faster, low rates may allow them to comfortably afford an accelerated loan repayment of 10, 15 or 20 years instead of a 30-year loan. For those who want to improve their cash flow with lower payments, a new 30-year loan at a low rate could be the solution.
Next week, we’ll share with you some low (and no!) down-payment options that are available and how to balance your down payment and cash reserves.