With all the recent talk of interest rates, the fed cutting rates a quarter of a percent, and Realtors shouting from the rooftops “now is the time to buy!” you may be wondering exactly what all this means, and how it affects you. So, let’s break it down.
Since we’re Realtors, and this site is all about real estate, let’s specifically discuss mortgage interest rates:
Unless you’ve just sold another home, are independently wealthy, receiving an inheritance, or just REALLY good at saving money, you’ll probably need to take out a mortgage to purchase a home. A mortgage is defined as a loan in which property or real estate is used as collateral. The borrower enters into an agreement with the lender (usually a bank) wherein the borrower receives cash upfront then makes payments over a set time span until they pay back the lender in full. [www.investinganswers.com]
A mortgage rate (or mortgage interest rate) is the amount of interest charged by the lending institution to obtain the loan. In other words, it’s the cost of the loan, and typically it’s paid back in monthly payments with the loan. This is called principle and interest.
It’s important to monitor the fluctuating interest rates because it directly affects how much house you can afford to buy. When a lender approves you for a loan, they approve you for an amount that is based on your income and the amount of debt you currently owe. Most lenders follow a formula that allows your mortgage payments to be somewhere in the neighborhood of 30% of your monthly income (again, taking into account other debts). Since the mortgage rate directly affects how much your monthly payments will be, the lower the rate, the higher the loan amount you can be approved for.
Here are two examples:
- You are considering the purchase of a $500,000, and you were already pre-approved for a loan at 4% interest. But, as luck would have it, before you write an offer, the rate drops to 3.75%, so you can still not only afford the home, but you’ll be paying less in interest over the life of the loan. The home became cheaper to purchase, simply based on the lower interest rate.
- In a different situation, you’re currently approved for a loan up to $525,000. You find your dream house, with absolutely everything you’ve been looking for. But, it’s listed a $540,000 and the agent says they’re holding firm to their pricing. With the recent reduction in interest rates, you call your lender for options, and they inform you that based on the new rates, you’re now approved up to $540,000! Problem solved. Again, purely as a result of the decline interest rates.
Finally, the difference between a 30-year loan at 4% and 3.75% is about $26,000 over the life of the loan, or THE PRICE OF A CAR!
So, there you have it. With 30-year mortgage rates around 3.75%, it is, in fact, a VERY lucrative time to buy a home, especially when looking at historic rates. Looking back through time, we are currently near all-times lows regarding mortgage rates, with some lenders joking that money is practically FREE these days.
1971- 7.69% | 1980- 18.44% (high) | 1990- 10.56% | 2000- 8.62% | 2010- 4.95%
Nov. 2012- 3.32% (low) | Oct. 2018- 4.86% | Aug. 2019- 3.75%
If you have more questions about loans, mortgage rates, or buying a home in general, reach out; We’d love to hear from you!