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Get Additional Buying Power when Interest Rates Drop

(Published on - 8/5/2020 12:59:19 PM)

With mortgage rates reaching a historic low, homebuyers have the opportunity to get additional buying power as a result of the decrease in interest rates. Even a 1% drop in interest rates significantly increases your purchasing power, so now is a great time to buy a home.

Mortgage Rates Fall Below 3%

The Federal Reserve’s efforts to support the economy during this global pandemic has translated into significant decreases in consumer borrowing costs. Their new policy has caused the average fixed mortgage rates to fall to historic lows.

The Freddie Mac survey of mortgage rates nationwide showed the average 30-year mortgage rate at 2.98%. This is the first time that rates have dropped below 3% since they began publishing this information in 1971. 15-year mortgage rates have also decreased to 2.51%, which is a significant reduction from last year's average of 3.22%.

Although most potential buyers were facing stay at home orders and quarantine requirements, pending home sales had a record jump of 44.3% in May. This has led the National Association of Realtors to predict that a comeback is building within the housing sector.

Additional Buying Power from a 1% Drop in Interest Rates

As rates continue to decline, the buying power of consumers continues to increase. Even with higher home prices, this provides a very attractive opportunity to lock in long-term rates since lower mortgage rates equate to lower monthly payments.

For example, a 1% drop in interest rates – such as the decrease from 3.98% to 2.98% – can lead to significant monthly savings. Here is the illustration on a $250,000 30-year mortgage:

$250,000 Mortgage 3.98% Interest Rate  $1,191 Monthly Payment 
$250,000 Mortgage 2.98% Interest Rate $1,051 Monthly Payment

As you can see, this 1% decrease in rates results in monthly savings of $140. This means that you will save about $50,400 in interest over the 30-year mortgage term!

Another way to look at this is to consider the boost in buying power. If a borrower is comfortable making the $1,191 monthly payment, then they can afford to take out a larger mortgage. Consider this example:

$250,000 Mortgage 3.98% Interest Rate  $1,191 Monthly Payment 
$283,250 Mortgage 2.98% Interest Rate $1,191 Monthly Payment

In this scenario, the 1% drop in interest rates has boosted your buying power by over $30,000. This means you can buy a more expensive home while keeping your monthly payments affordable.

What Does This Mean for Potential Homebuyers?

For potential buyers that qualify for mortgages, lower interest rates can counteract increasing home prices by boosting purchasing power. This has convinced potential borrowers to jump into the market, and mortgage applications have climbed close to the highest levels since the 2008 housing market crash.

Lower rates also have positive implications for existing homeowners, as refinancing provides an opportunity to lower their monthly expenses and free up cash for other purchases like remodeling.

Overall, this low mortgage rate environment has made it a great time to buy a home! For assistance in purchasing a home during these unprecedented low interest times, please call Realty Executives Exceptional Realtors® at (866) 742-5732 or email us at ClientCare@RealtyExecutives.com.

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