The Effect Low Rates Have on Your Buying Power

Published 12/28/2019

There’s more to consider than the size of your home loan

Mortgage rates matter massively when applying for a home loan, but the combination of Mortgage rates and Fixed rates influence the interest you'll pay over the duration of your loan. This combination is what we refer to as your "home buying power" — meaning how much home you can afford. Home loan rates have been close to record lows in the course of recent months. That implies numerous prospective homebuyers can almost certainly afford the cost of higher-priced homes.

How today’s mortgage rates affect buying power

Mortgage rates dove in August and September this year, approaching record-breaking lows. September's low reached 3.5% for a 30-year, fixed-rate mortgage. At that rate, it is possible to afford the cost of a home esteemed at more than $400,000 and pay just about $1,500 every month (excluding charges, protection, or HOA expenses). In 2018, when rates were over 4.6%, a monthly payment may have gotten you a home valued under $375,000. Truth be told, with each 0.125% change in contract rates, your purchasing power can rise or fall.

For the first time since 2016, the cost of affordable housing went up this year even though rates have dropped altogether since a year ago. On the off chance that you've been wavering about buying a home, you most likely need to act soon. You may find that you can afford the cost of a larger, preferable home than you thought – while still being able to make reasonable monthly installments.

How a 1% rate drop could add $30,000 to your pockets

It is an obvious fact that lower mortgage rates generally equal to lower monthly installments. For example, a 1% point drop in rates from 4.5% to 3.5% — can generate a month to month savings of $167 on a $200,000 contract.

To elaborate, think about this example: Sarah, a homebuyer has a month to month net pay of $5,000 and a normal all-out month to month expense of $2,250. Her obligation to-pay proportion is 45%. Sarah takes out a 30-year fixed advance of $250,000. At 4% interest, her regularly scheduled installment for principal, interest, taxes, and insurance (PITI) would be $1,193. Imagine if her rate was 3.5%. That rate reduction of a half percent expands Sarah's buying power by $15,000; assuming $1,122 is the most Sarah can afford to pay monthly. In the event that Sarah's rate was 3%, it would bring down her monthly installments to a very low total of $1,051, this also increases Sarah's purchasing power by $30,000!

Why mortgage rates are currently so low

Mortgage rates follow yields on U.S. Treasury debt. For instance, rates for 30-year fixed home loans trail the yield on the 10-year Treasury note. What's more, yields on U.S. treasuries have a reverse relationship to U.S. Treasury bond costs, which have been ascending for the past year. Additionally, there have been developing worries over the condition of the worldwide economy, except for the United States. Worldwide financial experts foresee that yields, and home loan rates, will continue its descend. This is because an economic correction is expected to happen sooner rather than later, even in the United States.

The interest climate is shifting lower because the economy is slowing due to tariffs and other factors. The U.S. interest market has likewise been affected by changing policy positions at the Federal Reserve. As opposed to implying another rate increment, the Federal Reserve indicated a stoppage to rate increases. While more recently, the Federal Reserve declared a financing cost cut of 0.25%. So even just a slight change in posture by the Federal Reserve can lead to declines in mortgage rates.

What should you do now?

You may be thinking "should I wait for rates to drop even lower?" which would expand your acquiring power. But then again, you could be thinking "would it be a good idea for me to secure now and buy sooner?"

There is a little possibility of any dramatic decrease in mortgage rates to come. That is because the bond market has already priced in another Fed rate cut by the end of this year. Current home loan rates are around 3.5%, which is exceptional since it is near a generational low. So on the off chance that you can stand to purchase now, and it bodes well to do as such, "put it all on the line." Rates can rise and fall on the turn of a dime, so it's keen to secure your rate when you get the perfect quote.

Curious what you could afford with today’s low interest? Check personalized rates and your approved home price. Then contact Darryl Glass via. phone (510) 500-7531 or email dglass@adventpropertiesinc.com, to find properties for sale in an area near you.