Looking a Gift Horse in the Mouth?

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Filed under: Market Comentary

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Continuing with our conversation last week about low interest rates, I have to ask the question: are we looking a gift horse in the mouth? The gift I’m talking about is the drop in interest rates we are experiencing right now.

1% Lower Interest Rate: How Much Will You Save?

If you do the math, a 1% drop in the interest rate equals about a 10% increase in your buying power. Or it means that you can get the same payment for a house that is bigger.

I am hearing so much indecision from people right now. The news keeps mentioning ideas about an upcoming recession, making people feel unsure about their real estate decisions. I wanted to look at the current situation, so I crunched the numbers for a 30-year fixed mortgage comparing a 4% to a 5% interest rate. This calculation was done assuming a $450,000 mortgage.

If you paid all 30 years of the mortgage, the 1% difference of a lower interest rate would equal $120,000 in savings in interest costs over the life of the loan!

Perspective about Home Values vs. Interest Rates

So, let’s look at that in perspective. In the last recession, the numbers dropped by about 30%, but most people don’t think that will happen again the next time around. Let’s say that we see a 10% drop in the next recession, then the potential $120,000 you would save in interest is more than 20% of the purchase price of the home. Even though you are buying a home for a lower price, the interest costs need to be factored in as well.

Don’t Sit on the Sidelines

These are the real numbers. Are you sitting on the sidelines wondering what is going to happen in the real estate market? If you are delaying your decision because you are wondering how prices will change, then you might be missing an opportunity.

Right now, we know that interest rates are in a great place. If you wait it out and interest rates go up, and home prices go down, then you are going to end up in the same spot financially.

I wanted to share a different perspective to help you see the opportunities available in the real estate industry right now. As you see the potential benefits, it might be good to ask yourself why you are looking this gift horse in the mouth instead of taking advantage of the current opportunities.

Reach out to me any time if you have questions. I’d love to work through some live numbers with you to see how your payment and financing would be affected if you decided to buy or refinance right now.

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