Whether you’re buying your first home, your 10th home, or you’re investing in a rental property, lower rates can mean the difference between a home that’s $500,000 and one that’s $300,000. If you’re financing a home interest rates matter and they can make or break a real estate deal.
Here’s how it works. Let’s say you’re going to buy a $500,000 house. With a 3% interest rate and a 20% down payment, that would bring your monthly mortgage payment to about $2300 including property tax and homeowners insurance.
In the 1980s, housing interest rates were well over 8% and in some cases up to 12% or more. This makes homebuying almost impossible at the same rate. For instance, with the same scenario above at an 8% interest rate, the total monthly payment would be $3600 and at a 12% interest rate, the monthly payment would be nearly $4800. Quite different than the $2300 payment with a 3% interest. Lower rates are a big plus right now!
Lower Rates Means You Can Afford a Higher-Priced House
This is why home buying right now while interest rates are low is really an excellent deal. Even if you don’t have a large down payment you can still save a lot of money. Let’s say you’re buying with an FHA fixed 30 year home loan at 3.5% down payment. Even with a 3% interest rate plus homeowners insurance and private mortgage insurance your monthly payment would be about $3100. Compare that to a 10% interest rate and you’re looking at $5300.
This naturally makes homes more affordable. If you can’t afford a $5300 a month mortgage payment, with the interest rates dropping, you can afford a lower priced monthly payment.
What is private mortgage insurance?
Private mortgage insurance is that one caveat that gets added on to a monthly mortgage payment if you can’t make a 20% down payment. It’s the added cost for the risk that the lender takes on by offering a house at a lower down payment.
Lenders and banks don’t want real estate on their books and it costs money to unload that real estate. They might need to fix up the home if it’s been trashed and/or hire a real estate agent to market and sell the home taking part of a commission. When there’s very little skin in the game when it comes to the buyer, if there is a default, there may not be enough equity in the property to turn around and resell the home. This is where private mortgage insurance comes into play.
It’s a type of protection that homeowners take out when they take out a home loan the covers the monthly repayments of the borrower defaults on the loan, loses their job, or simply cannot make the monthly payment. The mortgage insurance is taken out on behalf of the homeowner by the lender and it typically gets rounded up into the cost of the mortgage payment.
Private mortgage insurance can typically be between $300 and $500 a year, so it doesn’t add a lot to a monthly mortgage payment, but it can increase a payment making a home out of someone’s price range. However, good real estate agents may be able to negotiate the price of the home down far enough to cover the cost of the mortgage insurance allowing the buyer to afford the home.
All of these factors come into finding the right rate, down payment, and additional fees like property taxes and insurance to find the perfect monthly payment for the buyer. There’s a sweet spot that lenders have to adjust and tweak in order to get the right payment to satisfy everyone involved.
For more information on mortgage insurance, home affordability, or how much property you can afford with a monthly mortgage payment, contact me at any time. We can run over some numbers and find out how much home you can afford.
I’d love to help find the perfect home in Snohomish County for your needs and budget. Here are more tips!
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- How to Buy and Older Home in North Everett
- 10 Ways Homeowners ‘Trick’ Buyers in the Inspection
- 5 Things to Know About Buying a Historic Home
- The Importance of a Home Warranty
- What to know about the first year of homeownership
- More Details on Home Buying Affordability