by VIBE Realty
on Thursday, November 12th, 2020 at 4:18pm.
Interest rates. We know lower is better, but what's considered actually low, and how much does it affect your overall spending on the purchase of your home? Well, potentially quite a bit, which may be why we continue to see record numbers of home sales even in the midst of a global pandemic. Are today's buyers just valuing a home more than before, or are they just cashing in on these ultra-low interest rates? Let's take a look.
So we know we want a lower interest rate when purchasing a home, but that isn't the only factor we should be looking at. For starters, unless you're purely an investor, buying a primary residence has many more factors to consider than just the interest rate, and since we can't really control them anyway, we can't just put life on pause and wait for them to come down. Where you're at in life and where interest rates are when you're ready for that picket fence aren't necessarily going to always end up in your favor, but that doesn't mean you should ignore it, either.
Let's take an average purchase on a round number, just to make things easy. Let's say you're buying a $300k home, with a 5% down payment on a 30 year note, and the interest rate is 4.5%. We'll also assume the annual taxes are $2,500, and that homeowners insurance is $1,200 for the year. Your monthly PITI (principal, interest, taxes insurance) payment should be around $1,750 dollars all-in*. Now let's say you're making the same purchase, but you get it for a 3.5% interest rate. Your payment will now be closer to $1590. Only a $160'ish dollar difference, right? Not quite...remember, you are signing up to make that payment for 30 years, and interest rates are amortized over that entire time. Talking through amortized payment schedules is for another article, but assuming the payment schedule is followed exactly for the 30 year loan period, guess what the total interest difference comes out to once the loan is finally paid off...over a $59,000 difference! From 1%!
I can agree that this one example is grossly over-simplifying all of the components that go into interest rates, but it's common for people to overlook just how big of a difference the percentage can make over. Another important thing to consider is how your lender arrives at the rate they are advertising to you. Things like credit score and down payment percentage do play a large role, but companies also have ways to lock in at lower interest rates by using a term you may have heard of called buying down interest points. Simplified by basically paying some of that amortized interest up front(typically at a discount) when you lock the loan. Advertising these "low" can be a bit deceiving from the consumer perspective, so be sure to ask your lender exactly what goes into the rate you are getting.
All in all, the concept remains true, that lower is better. Just make sure that you are working with a trusted lender when they are helping you finance what is likely the largest purchase in your life. Don't be afraid to compare different lenders, and have them provide you breakdowns of their quotes, so you fully understand what their program is, and how it benefits you. Any of our agents at VIBE have great connections in the lending world, and would always be happy to connect you to someone that they have had good experiences with in the past, so reach out anytime.
*Home loans originated with less than a 20% down payment are likely subject to PMI (private mortgage insurance). Be sure to talk with your lender to find out how this would affect your PITI.