Over the past 5 months a huge benefit has quietly snuck in under the radar for home buyers and the media failed to inform anyone. Interest rates have steadily tumbled since June 2010 and the 30 year fixed rate of 5.25% five months later is now around 4.25%. What does this mean to you?
For Buyers - Do the Math
A $200,000 30 year fixed loan at a June rate of 5.25% generated a payment of $1104/m. That same loan amount will now drop to $983 at 4.25% which is a savings of 12.5%. Let me put that into perspective for you. You just saved $121 per month or $43,560 over the life of the loan! But that’s not all you saved. It’s really more like $60,000 when you consider tax write offs for mortgage interest and the effect of compounding interest on your money. It’s also a forced savings plan. Most of us would like to think we could save $120/m for 30 years but life gets in the way and we don’t. In effect this is a forced savings plan ensuring you sock it away every month. This scenario does not even contemplate value appreciation or inflation protection your home provides over the coming years.
$200,000 - loan you just saved 12.5% or $25,000!
$300,000 - $37,500 Savings
$400,000 - $50,000 Savings
$500,000 - $62,500 Savings
Additional Buyer Savings
- Lower sale price on new home also generates closing cost savings of 20%
For Sellers - Do the MathThis works in your favor as well. You will get less for your home today than its peak a few years ago. However, if you purchase a new home you’ll pay much less for that one as well. The gap between sale and new purchase price is usually constant. What is not constant is the interest rate (see savings above) which has dropped. In fact you’ll probably have a lower interest rate on your new home than you did on your old one.
Additional Seller Savings
- Lower sale price on old home generates closing cost savings of 20%
- Lower purchase price on new home sees the same savings of 20%
- Lower interest rates generate savings of about 12% over the life of the new loan
The best time to buy is when nobody thinks it is. Since we are officially out of recession we are most likely at the bottom of the housing market. We are definitely at the bottom of the interest rate cycle. The moment our economy shows solid signs of recovery you can bet interest rates will shoot up. Low prices, low interest rates, strong regional job market – advantage Buyers!
Who’s the next person you know that could benefit from this opportunity?