What Historically Low Interest Rates Mean for You as a Buyer

Okay, so every real estate agent and mortgage broker you know keeps talking about "OMG these interest rates are SO low, buy now!" But what exactly does that mean for you? Let me explain.

Of course the interest rate you get affects the total amount you ultimately pay to purchase a home, however, it has some immediate impact on your purchasing power as well.

First, let's start with what is a mortgage interest rate? Well, simply put, it's the cost of taking out a loan. It is the amount the lender charges to give you a loan to purchase a home. It's how they make money. With a high rate, you will pay more interest over the life of your loan, which increases the total cost of your home purchase. With a lower rate, this will reduce the cost of borrowing the money AND the total amount of interest you pay on it, resulting in paying LESS for your home.

Interest rates affect your purchasing power. What is purchasing power? Simply put, it's the ability to get value for your money to buy products and services. When you buy a home, the cost of paying interest is calculated in your monthly payment (which lenders look at your debt-to-income to see what you can afford each month, this is how they pre-approve you for a total purchase price of a home). If your interest rate is higher, this will make your monthly payment higher, resulting in you possibly not being able to afford such payment each month. When your interest rate is lower, this makes your monthly payment lower, and therefore you might be able to afford more house than you thought.

Example:

Tom and David are both looking for houses that are between $250k-$275k.

They want to spend the same amount each month on their mortgage payment.

Tom gets a higher interest rate, increasing his monthly payment.

David gets a lower interest rate, giving him a lower monthly payment.

Ultimately, David, with his lower interest rate, can afford a $275,000 home, but Tom can only afford a $250,000 home because his interest rate is higher.

David gets more house, for the same monthly payment.

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Let's go back in history and look at how interest rates can affect your purchasing power...All factors the same (debt-to-income, credit, etc.), except interest rate...

• 8% interest rate (1990-1999): $170,000 buying power

• 5% interest rate (200-2009): $230,000 buying power

• 4% interest rate (2010-2019): $250,000 buying power

• 3% interest rate (2020-current): $270,000 buying power

As you can see ONE point can change how much home you can buy. With the SAME budget a month, you can now afford a $270,000 home rather than a $250,000 home.

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Summarizing, you can now afford more home than you could in the past 30 years because interest rates are so low. Your interest rate affects how far your dollar goes when buying a home.

If you're thinking about purchasing, there's never been a better time. They are predicting interest rates to rise a little this year, and you can clearly see how much even one point affects your purchasing power. Buy now! Talk to a real estate professional in your area if you have any questions. If you're in the North GA area, I'm always available to chat!