How Much is 1%?

What do today’s low rates really mean?
Everyone is talking about the historically low mortgage rates currently available. Everyone is saying it’s time to buy.  We thought we’d provide a few examples to help explain how just a 1% change in interest rates drastically impacts your buying power.

What does this mean for buyers?
For buyers, it means the time to buy is now. Record low rates combined with a 7+ month supply of homes currently on the market makes this a true buyers’ market. As rates go back up (and they will eventually), buyers lose buying power, plain and simple. The same house listed at the same price will cost more money as rates increase.  If you are considering a home purchase, we highly advise you to do so before the rates increase so you can get the most out of your hard earned dollar.  In fact, if rates were to move just 1% higher (as they did over a two week period in June of 2009), the buying power is diminished by about 12%. 

Here’s an example with the same loan amount at two different interest rates:
A loan amount of $250,000 at 4.25% has a payment of $1229
A loan amount of $250,000 at 5.25% has a payment of $1380
       That means a 1% increase equals a higher payment by $151 per month or $54,360 over the life of the loan.

Here’s an example with the same monthly payment at two different interest rates:
A loan amount of $280,000 at 4.25% has a payment of $1380
A loan amount of $250,000 at 5.25% has a payment of $1380
         Assuming 20% at purchase, the buyer at the lower rate could get a home for $350,000, while the buyer at the higher rate could only get one for $312,500.  The end result is that for the same monthly payment, the buyer at the lower rate has $37,500 more in buying power, simply by buying before the rates go up!

What does this mean for sellers?
For sellers, one of the most common responses to a buyers’ market scenario is to pull the listing off the market and wait for better times.  However, waiting for better times will most likely mean that when they finally sell, the interest rates will have gone back up, diminishing the buying power they have for their next home. If you are selling your home and plan to buy once the sale is complete, there is a smarter solution.  If you reduce the price, you can more than make up the difference in the purchase by securing record low interest rates.

Here’s an example to explain:
Let’s say you are listing your home for $250,000 and hope to move up to a home that costs $350,000.
But at $250,000 you can’t sell it until the market recovers and interest rates by then have increased just 1%.
By holding off or holding out, your purchase power is now just $312,500…a difference of $37,500.

If you lower the price to $235,000 so that it will sell before the rates go back up, you will maintain some of that buying power.
If you reduce your list price by $15,000 now, you can sell more quickly and buy your next home before rates go up.
$37,500 minus $15,000 means you still have more buying power by $22,500 and you get to move up sooner.

Be an informed participant in the real estate market. Knowledge is the most powerful tool you can use.

Email us at info@missionmortgage.com if you have any questions.  We’re here to help.

Advertisements

About missionmortgage

A full-service professional mortgage banker providing lending in Texas for over 25 years. Our main office is located at 901 S. Mopac Expwy, Barton Oaks V- Suite 120, Austin, TX 78746 with branches in Lakeway, Houston, and Sealy. Mission Mortgage has been ranked as a Top 10 Mortgage Company in Austin for the past 7 years (Austin Business Journal).
This entry was posted in Mortgage News. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s