Low Interest Rates Affect Buying Power

Most people think that the lower the selling price of a house, the lower the monthly payment. Borrow less, pay less. It’s common sense, right? But what many people fail to realize is the cost of money – the mortgage interest rate – can be far more important than the cost of the home.

“Buyers are typically stuck on price – how much a property costs – and everyone wants to get the lowest price possible,”says Carl Worthy, training director at Prudential Locations.”The focus on a lower purchase price is for one main reason – to have a lower monthly payment. But rather than futilely waiting for prices to go down, securing a lower interest rate will create the same result.”

The truth is, with rates now the lowest they have been in 30 years, and even lower than earlier this year, buying power is higher than ever.As interest rates go down, buying power goes up. Here’s what that means to buyers:

* Get the home you want for less.For example,maybe you’ve had your eye on a house you saw last year for $500,000.But the monthly mortgage payment then, when rates were over 6 percent,was more than you could afford.But if the rates came down,that same house at that same price might now be affordable.In other words, a 2-point drop in interest,is the same as a 20 percent reduction in the sales price. So that $500,000 home now has the equivalent monthly payment of a $400,000 home. That’s more buying power.

* Get more house for the money. Let’s say you could afford the payments on the $500,000 house before interest rates dropped. Now, with that same payment, you can afford a $600,000 house. That’s more buying power.

* Lower monthly payment.

Remember, the lower the interest rate, the lower the monthly mortgage payment.

“Because interest rates are at their lowest level ever, that means at the moment, we also have the most buyers ever who are able to qualify,” Worthy notes.”Lower monthly-payment requirements mean more qualified buyers.”

Rates were hovering above 6 percent near the end of 2008 and then began falling into the 5 percent range in early 2009. By April, rates were below 5 percent for the first time in decades.

According to Freddie Mac’s weekly survey of conforming mortgage rates, the 30-year fixed rate mortgage averaged 4.54 percent this week, down from 5.25 last year.The 15-year mortgage rate is at 4.0 percent, down from 4.69 a year ago.

“For the sixth week in a row, interest rates on fixed-rate mortgages eased to all-time record lows,” says Frank Nothaft, vice president and chief economist at Freddie Mac.

“When you crunch the numbers, the drop in interest rates is better than getting a tax credit from the government,”Worthy adds.

Lower rates also mean buyers who couldn’t qualify for a mortgage prior to the rate drop may now be able to get into the game. In some cases, rates this low bring mortgage payments down to typical rental payments.

“Seriously, when rates are in the 4-percent-or-less range, and you’re still renting, this is the time to break out of that rental trap,” he says.”Hawaii has some of the highest rents in the nation.Talk to your real estate agent to see if you can buy a unit like the one you’re currently renting, and put your rent towards your monthly mortgage instead.”

Of course this window of opportunity is not going to stay open forever, since rates fluctuate.

“Grab these low mortgage interest rates while you can,” says Worthy.”Wells Fargo has an FHA 5-year ARM loan at 2.875 percent for the first five years.”

Opportunities are out there right now.With rates so low, see how you can exercise your increased buying power.

“Don’t wait for prices to go down, most experts believe we’ve bottomed out,”Worthy says.”Instead, keep your eye on interest rates.That’s where the killer deal is.”

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