Whenever there’s a decline in interest rates, purchasing a property becomes more affordable. In effect, home sales tend to increase as more buyers are able to take out a low-cost mortgage loan. Additionally, those with existing mortgages are given a good opportunity to refinance their mortgage, allowing them to trade their existing loan for one with a more favorable rate. During periods of low interest rates, more homes are also constructed to keep with rising demand, and home developers are able to borrow money at a lower rate in order to finance more projects.
In this section, we’ll take a closer look at a few key benefits to buying or selling a home when interest rates are low.
Last August, sales of new single-family homes throughout the US increased more than expected – the latest sign the housing market is getting a boost from lower mortgage interest rates.
According to the US Department of Commerce, new home sales increased by 7.1% to a seasonally adjusted annual rate of 713,000 units last August, which was caused by increased activity in the South and West. The previous estimate of 635,000 units for July was also revised to over 666,000 units.
The real estate market, which is considered highly sensitive to interest rates, has surged over the past several months due to a drop in mortgage rates. Reports have shown building permits and housing starts reached a 12-year high in August, along with home resales rising to the highest level in over 17 months.
So what does this mean for home buyers and sellers? In this section, we’ll take a look at some of the key advantages of buying or selling a home in a low interest rate market.
Significance of lower interest rates in the real estate market
The US Federal Reserve establishes a rate at which it lends money to financial institutions such as banks, which then affects the rate they offer to businesses and individuals, including homebuyers looking for a mortgage.
Whenever there’s a decline in interest rates, people in general are more likely to borrow money since it will cost them less now than at a later time. When interest rates are higher on the other hand, it becomes more expensive to borrow.
This applies to loans such as mortgages, in particular. When there’s a drop in interest rates, more people are willing to take on a mortgage than when rates are higher.
Buying a home now will be a solid investment
Today’s low interest rates combined with slight cooling in home price appreciation gives buyers a golden opportunity to make a smart investment.
You can’t really beat a good rate, so now is the best time to get in if you’re planning to purchase a property. If you keep waiting, worrying about a bubble burst and things that might not even happen, the gorgeous home that’s at an affordable price point could eventually be out of your budget.
More purchasing power
Lower interest rates give homebuyers more purchasing power. On a 30-year mortgage, a 5% interest rate with a $1,000 monthly payment allows a buyer to afford a home worth $186,282. In case that rate drops to 4%, the very same monthly payment will be able to afford a property worth $209,461 – an increase of around $23,000.
With low interest rates, homebuyers will be able to purchase larger homes for the same amount as a small house or condo more than a year ago. This makes it very ideal for buyers who face difficulty in looking for a home within their price range, as more options are available.
Home sellers benefit from declining interest rates as well, since more potential buyers will be able to afford their home. It’s an optimal time to put a home on the market, especially with mortgage rates not expected to increase.
More competitive mortgage lenders
Mortgage interest rates are closely related to Treasury yields, and right now the treasury rates are historically low.
Low interest rates make mortgage lenders very competitive, which means buyers can look forward to getting mortgage loans with very favorable terms. You might be able to negotiate in order to have junk fees removed, such as application fees, processing fees, and origination points.
Refinancing your mortgage leads to more savings
For existing homeowners, low interest rates offer the perfect opportunity to consider refinancing in order to get a lower rate.
According to Freddie Mac, the interest rate averaged 3.78% on a 30-year fixed-rate mortgage last October, compared to 4.83% in the previous year. The average rate on 15-year fixed-rate mortgages were even lower at 3.19%, which was 4.23% during the same time last year.
Depending on where you currently are in your loan’s lifetime, how much you still need to pay, and whether you have a good credit standing, refinancing your mortgage can help you save a huge amount of money on interest payments, and could even help you pay off your mortgage much earlier than expected. Keep in mind however that you will need to pay fees that are 2% to 4% of the principal loan amount in order for you to refinance.