Everything is on Sale

Filed under: Market Comentary

It was another Fed meeting today, so it’s timely for me to talk about interest rates in my weekly video. The announcement was that they decided to hold the Fed funds rate, although there has been rumor that interest rates might continue to decrease in the future.

As always, it is important to point out that the Fed funds rate is not directly correlated to mortgage rates. But it does lead me to another conversation about how interest rates affect your mortgage payment.

How Interest Rates Affect Your Approval and Payment

Most people get pre-approved to a maximum payment or purchase price. If you are approved at a particular payment, then your buying power increases when interest rates go down. For example, if the interest rate drops from 5% to 4%, that 1% decreased in the interest rate will increase your buying power by about 10%.

Rates hit a 10-year high this past November. Now, they have dropped just under a full percentage point, but for simplicity and illustrative purposes, let’s discuss this as if the rate drop was an even 1%. If that were the case, if you were preapproved for $450,000 at a 5% interest rate in November, now you can buy a $500,000 home and the payment difference is only $5 per month.

Alternatively, if you decided to stay at the price range of $450,000 with the lower interest rate, you are saving a nice chunk of money on your monthly payment. There’s no question that a lower interest rate can have a significant impact on your payments and the total amount of money that it takes to pay off the loan, including interest costs over time.

Mortgage Rates are Like the Half-Yearly Sale

When the half-yearly happens at Nordstrom’s, people go flocking… ready to choose what they want to buy because it’s on sale. In the same way, you can think about houses being on sale right now since the interest rates are so much lower compared to the rates last November.

Don’t ignore the opportunity to lock in a great interest rate! If you are thinking about buying a home or refinancing, then it’s a great time to have a conversation with me about your options.

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