Buying Power – Interest Rate vs Property Value
It’s not breaking news that interest rates are at an all time low, so it’s one of the best times to buy that dream home, don’t you agree?
Let’s dive into various perspectives – or peal back the onion if you will – and let’s uncover some real estate and investing trends and hopefully educate you on what it’s really like out there.
At the time of this post, the interest rates are terrific. You have 30-year mortgages averaging in the mid to high 2’s and qualifications are falling back to pre-COVID days. On top of that, money down on a conventional loan is as little as 3% for first time homebuyers, and 5% for returning homeowners.
Fun fact: A first time homebuyer is defined as any borrower who has not owned a property in 3 years. That could be you and you don’t even know it!
But Gabe, I want to put 20% down so I do not have to pay mortgage insurance; which is a valid reason except the mortgage insurance premiums are also at record lows.
Mortgage Insurance Premiums Are At Record Lows — What does that mean?
With these low interest rates the cost of money is inexpensive, it makes sense to keep more of it in your pocket by putting less down. Perhaps instead you decide to invest that money in something like real estate, where you can earn back significantly more than you would be paying out in mortgage insurance each month. At Blink, our goal is to have your money work for YOU! Honestly, that’s one of our core strategies here, so call us to learn how we can help you.
So things are great and you’re deciding if you’re ready to buy. You start looking, and realize the inventory is low. Perhaps a new build?
It’s currently a “Sellers” market, so the low inventory of houses ends up resulting in multiple people bidding on the same home. And yes, you guessed it – that drives the price of your dream home up. In fact, it is driven up to the point where it is very closely matching the increased purchase power you had with lower interest rates (almost).
Let me explain: Disclaimer based on premium credit score and other qualifications
Buying a house 2 years ago had a 4.25% interest rate, which was a great rate and afforded you a $250,000 house at a mortgage payment of $1,229 (Principal and Interest).
Instead now (2020) that same $250,000 house with current rates of approximately 2.875% is $1,037! So I want more house!
For the same (or very similar) payment of $1,264 today you can buy a $305,000 home!
Understanding Today’s Market
Here is where we need to understand today’s real estate market. Earlier I mentioned the cost of the homes are on the rise (specifically here in Houston). In some markets the rise is double digits and some places as much as 17%, ouch!
Let us use a reasonable number of 10%.
Scenario above the same $250,000 house is now selling for $275,000 and the $305,000 is going for $330,500.
So here we are with low rates and higher priced homes – what should I do?
My easy answer: Buy, buy and buy! The increase value of MOST homes is not enough to create a scare like 2008 and the guidelines are much stricter on Mortgage Brokers to help prevent this bubble from popping.
Of course, our Blink team encourages you to make sound and financially responsible decisions when purchasing a home. Build a relationship with a quality loan officer and real estate agent who is willing to educate and advise (IF YOU KNOW, YOU KNOW) that the time is now to buy.
If you’re ready to buy or ask questions related to your specific case, call me at Blink Lending today. We love making the numbers work for you and sharing what options you have.
