One of the most popular questions buyers ask in today’s real estate market is: “How much can I afford?” From your own finances to the national economy, each factor plays a part in determining your buying power. Last year, financial and housing experts would have painted a different picture than they would today. Interest rates have dropped 75 basis points (0.75%) from January 2014 to January 2015. That means your home buying power has risen 10%. Here’s the breakdown on the mortgage changes:
Real Estate Buying Power Increased 10%
Before buying, there are two things to consider: Mortgage rates have been declining, but home values have been rising. Naturally, you might think they offset each other, but mortgage rates influence “affordability” more than home values do. Let’s do a hypothetical example:
- Home Values = Up 4% nationwide (Case-Shiller Index)
- Mortgage Rates = Drop from 4.52% to 3.73% nationwide
- Last year (2014), you were approved for an $180,000 loan against a $200,000 house (10% down payment). If you decided to wait on buying until 2015, because you couldn’t find a home you liked, you can now buy “more home” for the same price.
- $200,000 Home x appreciated by 4% = $204,000
- 2015 Mortgage Rates = Loan approval for $220,000 (versus $180,000)
You can see from the example above that mortgage interest rates drastically changed your affordability level compared to the home value’s increase. As a result, you can now be approved to buy a bigger, more expensive home.
The Better Deal: 15-year Mortgages or 30-year Mortgages?
With current mortgage rates dropping, this is also a good time to re-evaluate which loans are the best options. For a lot of homebuyers, we stick to 30-year mortgages, because they offer lower monthly payments. The catch is that you have a longer period of paying interest, costing you more money in the long run. Plus, a lot of buyers forget that the interest rates between the two mortgages are different.
- 30-yr Mortgage Rate = 3.73%
- 15-yr Mortgage Rate = 2.98%
15-year mortgages are beneficial in two ways: 1) The interest rate is lower, meaning you pay less back in interest and 2) You will own the home in half the time. For example, if you were approved for $268,500 loan, you will pay $109,000 less with a 15-yr mortgage than a 30-yr mortgage (with today’s interest rates). That is a 63% savings. You can use that money to put down towards your retirement, college tuition payments, or a business investment.
If you’d like more information about your home affordability level and your purchasing power in Summit County, you can contact our local mortgage expert.