How do interest rates effect your purchase?
There are 5 financial components that every buyer should consider when purchasing a home: Purchase price, down payment, interest rates, taxes, insurance and home owners association (if applicable). Together these items produce a total payment. So how does the interest rate impact the total payment?
The interest rates can impact the payments considerably. Today, Interest Rates (IR) are close to 3.75% for a standard FHA loan. On a $150,000 purchase price with 5% down ($7,500), the principle and interest payment is $659.94. Six months ago, interest rates were 5.58% the same scenario, changing only the IR you payments are now paying $816.27, a $156.33 difference.
As the interest rates adjust, so can the type of home you purchase. As long as the prices remain the same, you may be able to find yourself in a larger, nicer home than you otherwise could have afforded. If the higher payment of $737.23 is within your budget, you could look at an increase now in your purchasing power. Instead of purchasing a $150,000 home, you can no consider an $185,000 home.
Home values will tend to incline as the inventory is low and if the interest rates remain low. For those homes priced under $130,000 there is a huge demand as inventory has dropped. There are only 42 active single family homes in the Cedar City and Enoch areas and 36 pending.
What loan program is right for you? There are many different types of loan programs out there. Depending on your credit score and debt to income (DTI) ratios, your lender can advise the best loan program that’s right for you. Popular programs include FHA, USDA (100% financing), Conventional, VA.
Is an adjustable rate good? Adjustable rates for the typical borrower is a bad idea. These programs typically start out with lower rates and then adjust to the rates at a future date. With rates extremely low right now, the best thing you can do as a borrower is lock that rate in and make sure it doesn’t change.
How low are our current rates? In 1980, interest rates reached an alarming 20%. Using the scenario above ($150,000 loan) with a 20% interest rate, your payments would reach $2,381. For the past 4-5 years, the rates have remained extremely low.
What does the term “point” mean? Often times, we hear things like, you can buy down your rate with discount points. As Bank of America has described, points are upfront fees paid at closing in exchange for a reduced interest rate. Read entire example by clicking here. A point is equal to 1% of your mortgage amount (or $1,000 for every $100,000). You’re essentially paying some interest up front in exchange for a lower interest rate over the life of your loan.
Should I hurry and buy a home to take advantage of the low interest rates? That’s a difficult question to answer. I would never suggest anyone get into a financial situation that he/she could not afford or if the timing is not right. Depending on a borrower’s situation in life (family, student, dependents, career, and goals) will greatly depend on the decision to buy or to rent. I personally support and agree with home “ownership”. I recommend talking to a Realtor who can help walk through your scenario with you and help you decide if purchasing a home now is the right decision.
When you look at your purchase, remember the strength you have with low interest rates. By working with a reputable lender and realtor you will receive the best advice for YOUR situation not theirs. In most cases, your interest rates should be locked for the term of the loan. Adjustable rates can be your worst enemy. Rates won’t stay this low forever so be cautious and smart as you proceed with your next purchase.
