With Rates at Record Lows, Affordability Grows for House Hunters
01/20/2021 Corinne Browne
Have you been keeping a close eye on today’s housing market? If the answer is “yes,” then you’re well aware that interest rates are at historic lows. But if you’ve been holding off for just the right moment until home prices and financing options meet miraculously in your favor, there’s really no reason to wait any longer.
Low Mortgage Rates Making History — For Now
Driven by concerns brought on by the coronavirus pandemic, the Federal Reserve has been maintaining the benchmark interest rate at the historically low range of 0.00% to 0.25% — matching their lowest levels from over a decade ago, when the Fed cut them to nearly zero during the 2008 housing crisis.*
According to Freddie Mac, mortgage rates remained at their lowest levels in history for the first week of January, 2021, with 30-year fixed-rate loans averaging 2.65% as of January 7, 2021. Today, the typical mortgage is still hovering around a percentage point cheaper than a year ago when the average rate was 3.73%.**
While it remains uncertain as to when rates may begin to head back up, once that does occur, one of the housing market’s first casualties will be a homebuyer’s opportunity to get the extreme value we’re seeing available today on a home loan with lower rates.
And even if you don’t have 20% saved up for a down payment, buying with less down can be easily accomplished in many cases. In fact, depending on your situation, you can buy with as little as 3% down. There are also programs that allow for tremendous flexibility in regards to your down payment source. A Pennymac loan specialist would be able to guide you through the options that most conveniently match your needs.
As long as you have sound credit and a qualifying debt-to-income (DTI) ratio, buying in today’s hot market can prove remarkably beneficial while rates are this low.
Your Buying Power With Low Interest Rates
There are several factors that determine homebuying affordability and your purchasing power, but mortgage interest rates are playing the largest part in today’s market.
In the simplest terms, a mortgage interest rate is the percentage of a principal home loan amount that a lender charges a borrower. With a higher rate, you’ll pay more in interest over the life of your loan, while a lower interest rate will reduce the cost of borrowing and the total amount of interest that you’ll pay for your home.
A lower interest rate can mean the difference of potentially hundreds every month, thousands every year, and many thousands of dollars saved over the entire life of your loan. It can also bring forth the possibility of buying a new home for some, or perhaps bring a more expensive home within reach that a higher rate environment would not so generously allow.
For instance, let’s say you have a monthly budget of $2,000 to spend toward principal and interest on your mortgage payment. With a lower rate, that $2,000 per month can go further toward the amount of house you can afford.
To illustrate, consider you’re looking at a 30-year fixed mortgage at a 3% interest rate. You could buy a house priced up to $475,000 while still maintaining your monthly budget of $2,000 principal and interest. If your rate were just 1% higher, however, you’d be limited to a purchase price of no more than $420,000 to keep within your budget.***
The difference between 3% and 4% means a $55,000 reduction from your maximum purchase price and an 11.58% loss in purchasing power. Just a 1% rate reduction could make the difference between getting into a home or not, or settling for less than what you were hoping for in a house.
Getting More for Your Money
Is your current home too small to contain your growing family? Are you an empty nester, ready to downsize? Maybe you want to be closer to extended family or friends. Or, you want to move closer to better schools and live in a community with more services, restaurants, and other amenities that better suit your needs. Record-low mortgage rates can empower you to really get what you really need, and want, in your next house.
Covid-19 has changed the way homebuyers view square footage, especially in terms of privacy and workspace. The pandemic has also demonstrated that the need to live near a brick-and-mortar employer may be less of a necessity, as working remotely makes commuting a thing of the past.
For those considering buying property as an investment, today’s mortgage rates could be your key to entering the short-term rental market. Rental property has the potential to provide consistent cash flow as well as possible significant tax benefits. Also, even when rental property appreciates, the IRS allows you to deduct depreciation (Consult your tax adviser for further information regarding potential tax advantages with rental properties). ****
Whatever your reason, whether it be the desire to live in a ‘smart home’ or have a bigger kitchen to suit your new passion for sourdough breadmaking, this could very well be your best opportunity to jump in with both oven mitts.
Timing is Everything — Make Your Move Today
Although low mortgage rates have placed more buying power in the hands of aspiring homeowners, it’s also resulted in an increasingly competitive seller’s market. So, for house hunters watching from the sidelines, time is of the essence.
To take advantage of today’s great rates — as well as a market that’s still in your favor — be ready to act when your dream home hits the market. A smart first step to take in your preparation is to get pre-approved before you start shopping. Your pre-approval from Pennymac will allow you to know your exact borrowing budget, as well as give your offer credibility to a seller once your dream home does appear.
****Sources: https://investorjunkie.com/real-estate/rental-property-investment/ ;