More on Interest Rates
Happy Friday!
I spoke about Interest Rates yesterday as part of my discussion on why this Real Estate Market is different than 2007-2012 (Read it here: Blog Post 3/27/2020). I wanted to Expand a bit on why Interest Rates matter a lot, and maybe even MORE than the housing price.
Obviously, hopefully this goes without saying that people should not WANT to buy at the top of the market, but the point here is that buying at a price and a Rate you can afford are the more important topics for discussion. An increase in Interest Rates can have a more significant effect on purchasing power than an overall change in the price of a home. I have put together a chart that shows Interest Rates ranging from 3% to 6%, and Price Ranges (Loan Amounts, not necessarily Sales Price) from $300,000 to $450,000. See the chart below:
For this exercise, we are going to use a few assumptions. Forget about the “Purchase Price” or “Loan Amount” for a moment, and pretend you had a monthly budget for your payment. After all, we all live on a Monthly number, and the ‘price’ of your home is merely a point to brag about. So for this exercise, pretend you are absolutely comfortable paying up to $2,000/month for your mortgage. And you would go between $2,000 and $2,200 if you NEEDED to, but you absolutely will not be able to go above $2,200 for your mortgage.
So, with that being said, pay attention to the chart now. If Rates are at 3%, you could easily afford a home loan of up to $450,000! That’s a lot of house! Considering our Median Home Value in Las Vegas is right about $300,000, this shows you the type of home you would be able to qualify for. But if that rate goes from 3.0% to even 3.5%, you’re now over $2,000 a month, and in an ‘uncomfortable but doable’ position. As soon as the rate rises above 4.0%, you’re in a position you would NO LONGER QUALIFY! So, if you wanted to stay under $2,000 per month, you could go all the way to a $450,000 loan when rates are 3.0%, but any higher, and you wouldn’t feel comfortable.
To stress this further, and give you ‘absolute’ values. If you wanted to stay UNDER $2,200 per month, you could afford a $450,000 loan up to 4%, but if rates went up to 6%, you would only be able to afford a home loan up to $375,000! You would ‘lose’ $75,000 of purchasing power if rates went to 6%! That’s a lot of house that you all of a sudden would NOT QUALIFY FOR!
Last point on this. Looking at the chart, You will have essentially the same payment, about $1795/mo, when borrowing $300,000 at 6% and borrowing $425,000 at 3%! Same monthly payment, $125,000 difference in value! All because of the Rate you get. So if you’re waiting for prices to drop… be prepared to pay to potentially pay a HIGHER mortgage rate as well, essentially offsetting any ‘gain’ - your money will end up costing you more, and your payments will be about the same!
If you’re SELLING, this is also why Interest Rates are so important. The lower the rates, the more home a buyer can afford. If you’re trying to sell a home for $450,000, you WANT rates low; more buyers would be able to qualify for a loan than if the rates were 4%, 5%, 6% or more.
So, what is more important? Home prices rising or falling a few percentage points here or there or Interest Rate fluctuation. While we all pay attention to the Big Number (housing values), we should be paying MORE attention to the price of the borrowed money.
Don’t wait for Rates to Jump back above 5%!
Rates are still low! The only way to secure your property purchase value is by locking a lower rate today! Take advantage of a market with attractive Mortgage Rates.
Have any questions? Want to talk specifics? Let me know and I’ll get you in touch with a Lender that can discuss your specific situation in much further detail!
Have a great weekend! Stay Happy and Healthy!
-GZ