Mortgage Interest Rates Fall, Home Affordability Rises
Last week, mortgage interest rates hit a new low for 2014, meaning buyers can get "more home" without increasing their desired monthly payment.
I believe the fact that there are so many websites that offer current mortgage rate information sometimes numbs homebuyers to the importance of the cost of money when they buy a home.
So let's take a look at how different interest rates will impact three different buyers in today's Tallahassee real estate market.
The First Time Homebuyer
The typical first time homebuyers that we are working with are buying a home for right around $150,000. Almost all of these buyers are using loan products that allow for 95% to 100% financing, so we will use a $140,000 loan for our example.
In the table on the right, we increase the mortgage interest rate by one half of one percent repeatedly to show how fast the buying power declines.
If current rates increased by only one-half percent, first time homebuyers would lose the ability to borrow $8,000, or roughly 6 percent of the purchase price. Considering most are only putting 3.5% down, this would triple their down payment if they wanted to buy the same home.
I have not met many first time homebuyers in Tallahassee who have the resources to triple their down payment.
The Established Family
A very popular price range for established families includes homes for sale between $250,000 and $300,000. In Tallahassee, many of these buyers are borrowing money between 80% and 95% of the purchase price, so for our example we will use a $250,000 loan.
Just as we saw with the first time homebuyer, the established family sees their buying power decline 11% if interest rates were only to rise 1%. But take a look at the bottom of the table, where the "highest" rate shown is 8.75%.
This rate is barely above the 50 year average mortgage interest rate, and that means the established family who now can afford payments on a $250,000 mortgage would only be able to swing one at $156,000!
Is it unrealistic to expect interest rates to return to normal sometime in the near future?
The High End Home Buyer
I have read that high end buyers around the Country are paying cash, but my measurements in Tallahassee tell a different story.
Roughly 70% of all homes sold for more than $500,000 are financed, and that means jumbo mortgage interest rates are critical (I have used the same rates as above, though current jumbo rates appear to be slightly lower than conventional rates).
While luxury homes for sale in Tallahassee are offered as high as $6M, let's take a look at somebody buying a $650,000 home, financing $500,000 (a more common high end home buyer). Today, their principal and interest payment would be $2,337 per month, allowing them to afford the home with the half million dollar mortgage.
But as soon as rates return to 6.25% (the average rate just a few years ago), then they lose the ability to borrow $100,000 for that home.
So here's my questions for our luxury home sellers ... if the buyers need an extra $100,000 to buy your home, will it have an impact on how they perceive the value of your home? Will the buyer pool be reduced by the amount of people in Tallahassee who do not have an extra $100K to spend, or by those that cannot afford a higher monthly payment?
Mortgage Interest Rates Control Home Affordability
There is a very real correlation between current mortgage interest rates and home affordability, and when rates eventually rise, it will impact us all. This is not just going to hit buyers, but sellers too. Demand at the highest end will decline, and that will bring pricing pressure to a market that is already glutted with inventory.
Falling mortgage interest rates help both buyers and sellers, just as the opposite was true for both. Current rates are at the lowest level recorded thus far in 2014, so make your plans accordingly.
If you would like to know how much home you can afford based upon today's mortgage interest rates, just drop me a note and we will get our top lenders to work up a no-obligation quote that you can trust.