Increasing Your Purchase Power
Most of the time you hear anyone talk about the advantages of today’s historically low interest rates, they are referring to how low your mortgage payment would be if you bought a new home today. This is probably the way many people go about purchasing a home. They don’t think of the total cost of the home, but rather how well the monthly payment fits into their budget.
This is especially true if you’re moving from a lease or apartment situation, and you’re interested in seeing how much home you can purchase for a payment that is close to or the same as your rent or lease. But let’s face it, some families have a set budget with a monthly house payment with which they’re comfortable. For these families, it’s more about getting as much home as you can for the amount you’re ready to spend rather than trying to get a low house payment that compares to your monthly rent.
So, how do today’s interest rates help you get more home for the money? It’s all in the rates.
Compare Principal and Interest Payments
One easy way to look at it is to compare the principal and interest payments on three loans, all at different rates and look at the difference between them. Let’s assume that you want to keep your monthly principal and interest (PI) payments on your mortgage at around $1,500 per month. On a thirty year loan, at today’s rate of around 3.75%, you’ll be able to purchase a $250,000 home.* However, a single point increase in the interest rate (4.75%), would only allow you to purchase a home valued at $221,000! A decrease of nearly $30,000! Think of the difference between a $250,000 home and a 221,000 home. Think of the difference in size, the extra bedroom, office or media room, the better neighborhood, higher rated schools and premium location! That single point of interest increases your purchasing power by nearly $30,000! It’s even more dramatic if the interest rate increases to 5.75%. Now, for the same $1,500 house payment, you’ll only be able to purchase a home valued at $200,000! There is a world of difference between a home valued at $200,000 and a home valued at $250,000. So when you hear people talking about the increase purchasing power that today’s interest rates give you, they’re taking “real money”.
Low Interest Rates Significantly Increase Your Purchase Power
If you’re looking to purchase a home at a higher price point, these numbers start to get very significant. Let’s say you’re comfortable with a new home payment of $2,000. On a 30 year loan at 3.75% you could purchase a $435,000 home. This payment excludes taxes and interest, but I’m sure you’re starting to get the message! But if that interest rate increases a single point to 4.75%, your purchasing power decreases $50,000, and you’ll be looking at homes valued at $385,000! Don’t get me wrong, there are some beautiful homes you can afford for $385,000, but they don’t compare to those that are priced at $50,000 more! Another increase of a single point, and your purchasing power has decreased another $40,000 and you’re now looking at homes valued at $345,000. Again, these are beautiful homes, but you’re looking at properties that are valued significantly lower than those you’d be considering at lower interest rates.
There are two ways to look at the benefits of low rates. The first is to see how these rates compare to your current renting and leasing situation and use them to determine if you should make the move to home ownership. The second is to look at how these low rates can significantly increase your purchasing power and allow you to buy bigger or nicer homes. Low interest should generate high interest from today’s home shoppers.
Tom Bevins is Senior Vice President of Hot On! Homes, a new home marketing and advertising company based in Dallas / Fort Worth, TX, with offices in Houston, San Antonio, Austin, and Colorado Springs, CO.
Contact Tom at firstname.lastname@example.org