Mortgage Interest Rates 20% Lower Than Last January

Mortgage interest rates are currently 20% below where they were one year ago, perhaps a signal that the housing market could push higher.

Contrarily, the supply of homes for sale in Tallahassee is also 20% lower than in January 2019, which could easily lead to the slowing of the market as buyers await new inventory.

Whether you own a home or are thinking of buying a home, current conditions suggest you should take action.

Don't Market These Mortgage Mistakes!

When we look at mortgage rates going back to 1971, we see that today's rates are very, very close to the lowest they have ever been.

Historic Mortgage Interest Rates

The fifty-year average mortgage interest rate has dropped to an even 8.00%, which means today's rates remain below 1/2 of the historical norm! Whether you are buying a home today or you just are considering a refinance, you should definitely speak with a local mortgage lender to determine your options.

For those with homes already, look at what they will offer you for a no-cost refinance (which is merely a refinance where they roll closing costs into the loan but you end up with a lower rate). History suggests that rates will move higher, so grab some of this cheap money while you still can, if it makes sense.

If you are in the process of buying a home, the prudent move is to move fast. We've seen rates move slightly higher over the past three months, and every tick higher either means a higher monthly payment or a lower buying power.

But that's not all. Let's look at how mortgage interest rates and the declining supply of homes for sale will impact buyers in 2020.

If we make the assumption that rates are going to rise and inventory is going to remain tight, then I can share with you what will happen to many buyers.

They are going to take the wrong approach to the home buying process and end up taking too long to get the right home under contract.

How Rising Mortgage Interest Rates Impact Buying Power

Let's say you go out and start shopping for homes that you can purchase with a $300,000 loan. You spend your time and you don't make any rash decisions. When you find "the one," you make what you feel like is a good offer.

After you submit your offer, you are told that yours is one of several offers and you are asked to sweeten the offer if you want a chance at the home. So what do you do? Who do you get advice from? Do you ask your lender? Your real estate buyer's agent? Who has the experience, as well as your trust, to guide you on this?

Well, if you are like most buyers, you did not choose your buyer's agent wisely and you now are in a no-win situation. In fact, most buyers in today's market fail on their first offer because they did not have a negotiation strategy that was based upon market conditions. They started the process all wrong and it ended poorly.

In this example, you fail to get the first home, time is lost, and mortgage interest rates have risen

The table on the right demonstrates the impact of a delay in purchasing when mortgage interest rates are rising. A 1/2% move in rates means you now have to bring an additional $18K in cash to closing in order to qualify for the same home.

In other words, you have lost 6% of your buying power because of the delay caused by your lack of understanding of the home buying process in today's market.

Now, another way to view this same scenario under different conditions is to look at the impact of your monthly mortgage payment. Let's change the assumption above to one where you can afford a more expensive home, you just want to keep your home price around $300,000.

All of the processes and events unfold in this scenario as they did in the one prior, and thus you find yourself delayed in the purchase of your new home.

Since you can afford to spend more on the home, it has not truly impacted your buying power, rather it will now cause you to spend more on your monthly mortgage payment due to the higher rate.

The table on the left shows with an increase of the mortgage interest rate of 1/2%, your payment will go up 6% (in this case $87 per month or $1,044 per year, which is $31,320 of the life of the mortgage). Remember, current rates are near historic lows, and one of these days we will see them move higher (likely above today's rate for the remainder of our lives).

So how quickly can mortgage interest rates change? Take a look at the graph above. In 1971, rates were 7 1/8% and in less than 3 years, they were topping 10%! So what would an increase of 3% do to for a buyer or refinance today?

Instead of being able to afford $300,000, a buyer would see buying-power reduced 29% to $214,079! And remember, low inventory means that values are moving much higher, so that $214K home was likely $200K when the buyer first started shopping 3 years prior!

Another way to view the impact is with the mortgage payment. A 3% increase in the mortgage interest rate would move the payment 40% higher! Instead of paying $1,384 per month, the higher payment would now be $1,940 per month.

That is $556 more per month,  $6,672 more per year, and a whopping $200K more during the life of the loan. Seriously, this could happen, and it has several times before in the past 50 years.

Whether buying or refinancing, lock-in to today's cheap money before it's gone.

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