Posted by: Brian Powers | June 2, 2010

What’s it REALLY mean when interest rates go down?

Mortgage interest rates have been a hot topic in the news recently, as rates continue to decline.  This can impact buyers and sellers in a couple of different ways.

The first for buyers is obvious. Lets assume as a buyer, based on your credit scores and debt-to-income ratio you qualify for a $600 per month payment (principal and interest only).  At the time of your pre-approval, interest rates were 5.5% which qualifies you for a  mortgage loan of $105,673 based on a 30 year fixed rate loan.  If rates decline to 5% that same $105,673 mortgage loan will carry a reduced payment of $567 per month, saving the buyer $33 per month.

Not bad. But an even greater benefit to the buyer can be the effect lowered interest rates have on a buyer’s purchasing power.  This morning I was talking to one of the mortgage lender’s on my team, Drew Sygit of The Lending Edge Team, and we discussed this very issue and looked at some specific examples.  Let keep with the original example above, with the buyer qualifying for a $600 per month (P&I) payment and a $105,673 mortgage loan based on a 5.5% interest rate.  What happens if rates go down to 5% and the buyer is comfortable keeping his payment at $600 per month? The buyer can now qualify for a mortgage loan of $111,769 with the same $600 payment.  That’s an increase in purchasing power of over $6000!

Let take it to a larger scale. A buyer qualifies for a $900 (P&I) payment, and with rates at 5.5% gives the buyer the ability to take out a $176,121 mortgage loan.  What happens to the buyers purchasing power if rates go down to 5%?  That same $900 per month now gives the buyer the ability to take out a $186,282 mortgage loan…an increase of over $10,000!

Any buyer in the market right now knows that the competition for the best listings is fierce. There just isn’t a lot of good listing inventory out there, compared to the last few years.  As a buyer, wouldn’t you like to have the ability to offer a little more for the home of your dreams instead of losing out to other buyers?  As a buyer you need to be working with a real estate agent who understands how a small decrease in something like interest rates can have a huge impact on your ability to buy a house.  If you’re a buyer in the market right now and it’s been a few months since you received your mortgage pre-approval, you could very well have the ability to afford a better home and not even know it.  I’ll also add that if your real estate agent or mortgage lender hasn’t discussed these things with you, it might be time to look at working with people like myself and Drew.  Professionals who will make sure you are the most well-informed buyer in the marketplace.

What about sellers? Think about the examples above.  When rates go down, it pushes more potential buyers up into your price range and your home becomes more marketable to sell.  With the recent reduction in mortgage interest rates, your home will have more appeal to the buyers in the marketplace than it did before rates went down.  If you’ve been thinking of selling, now might be a good time to consider putting your home up for sale.  If you decide to wait and rates go up in the future, it will have the reverse effect and you will have fewer potential buyers for your home.

Thinking of Buying a new home? Start your MLS search today by opening up a free Listing Book account.

Listing Book

Considering selling your home? Go to my website and sign up for free market analysis of your home so you know what it’s worth in the current market.

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