Declining Interest Rates Open Up New Possibilities for Home Buyers
Mortgage rates were lowered again this month, down 31% from the peak in 2018. This has brought the cost of buying a home down to what many economists have declared a historic low. This news comes at a time when the home buying market is gaining momentum entering 2020.
What exactly does a low interest rate mean for prospective home buyers?
Freddie Mac states, “With mortgage rates hovering near a five-decade low, refinance application activity is once again surging, rising to the highest level in seven years. This surge coupled with strong purchase activity means that total mortgage demand remains robust, reflective of a solid economic backdrop and a very low mortgage rate environment.”
For those who act fast, locking in this low interest rate can have a significant impact on monthly mortgage payments. For example:
- With current 30-year mortgage rates, the monthly mortgage payment for a $350,000 mortgage is $1,562. The same $350,000 mortgage with higher rates in 2018 would have a mortgage payment of $1,879. That’s a saving of $317/month or nearly $4,000/year.
- Conversely, with current 30-year mortgage rates, a monthly mortgage payment of $1,879 would be for a $420,000 mortgage. That means the same buyer that had a $350,000 30-year mortgage in 2018 could now get a $420,000 mortgage for the same monthly payment. A buying power increase of $70,000.
- Overall, the lifetime cost of a $350,000 30-year mortgage with current rates is reduced $100,000 from what it would have been in 2018.
With this shift in interest rates and subsequent increase in buying power, the housing market is now wide open to buyers, many of whom previously might have been unable to even purchase a home in late 2018 or early 2019.
Seizing the Opportunity
Potential homebuyers are taking advantage of this perfect storm of conditions, and mortgage applications surged by more than 30 percent during the same timeframe that rates decreased. This steady stream of buyers has the potential to drive up home prices and lead to a stabilized market that the Federal Reserve seeks to create. And if these conditions persist, then interest rates could be raised again, meaning potential home buyers will again have less purchasing power than before.
For the time being, the window of opportunity is open making it an ideal time to purchase a home. The key is benefitting from the opportunity before the window closes.