What do Historically Low Interest Rates Mean?
When I purchased my first house at the age of 22, we didn't bat an eye at the 10.5% interest rate for my first mortgage. We were also required to put down 20% and it was only a 10-year mortgage (not our choice). That house also only cost $18,300, and our monthly payment was around $210.00 total (including taxes).
I didn't think I'd ever see rates this low. And I'm talking about 6%, 5%, 4%, and 3%. So I never expected less than 3%, but that's what happened in July of 2020.
Did you know that in 1971 the average mortgage rate was 7.31%? I was a few years out from owning my own home, and interest rates were higher when I bought, but in my 37+ years in the real estate business, 7% was a good rate. In fact, at one point in time, around 2012, rates had risen to 18.63%!
I purchased a property in the 1980's where the rates were 12.87%. Then in the late 80's it was a Seller's Market when rates fell to 8.5%. That was the first crazy Seller's Market I had ever been in. It wasn't quite as crazy as today's Seller's Market, because there wasn't such a lack of inventory at the time.
Some explanations for these low rates are that mortgage rates follow bond yields. Because of the pandemic, investors are changing their investments from the stock market to low-risk bonds, which brings mortgage rates down, since most mortgages are packaged together and sold as bonds.
Lawrence Yun, the Chief Economist of the National Association of Realtors, says the low rates are because the Federal Reserve is keeping rates low and to buy up mortgage-backed securities.
How Low-Interest Rates Help Buyers
I probably don't even have to explain this because it's pretty simple. Today's historically low interest rates give buyers more purchasing power. They can afford a higher purchase price.
Here are some examples based on different interest rates:
1. If you'd like to keep your payment to $1,500/month, at 5% interest, you could get a mortgage of $279,000. That's the mortgage payment, not the cost of the house, which will depend on your down payment and ratio qualifications.
2. For the same payment of $1,500, but at 4% interest, you could now afford a mortgage of $314,000! Again, that's just the mortgage amount, and depending on your down payment, you could possibly get a house priced even higher.
3. Now look what happens if rates drop to 3%. Keeping that same $1,500/mo. payment, you'd now be able to afford $355,000! If you have 20% down, you can actually buy a house in the low $400,000's, depending on your qualification. These are huge differences.
There is a downside - no matter how much inventory is available, low-interest rates bring out the buyers, and any home that is priced correctly will have multiple offers. This means you'll be involved in bidding wars, and sometimes it can start the first day a house gets listed in the MLS (multiple listing service).
In today's low inventory Seller's Market, it is very hard for many buyers to compete. FHA and VA buyers are up against 20+% down conventional buyers and cash buyers. Homes are getting thousands over list price. We got $25,000 over list price for our house in IL. But in some high priced states, like California, sellers are getting hundreds of thousands above the asking price.
Other buyers are waiving inspections (something we don't advise, but if it's the only way to get a house you love, it might be necessary), and are also agreeing to accept a low appraisal (as long as they have the cash to make up the difference). That can't be done with FHA.
The bottom line is, low-interest rates push prices up. When buyers in low price ranges can't compete in bidding wars, some give up and continue to rent or stay in their smaller properties. Even buyers in higher price ranges can face bidding wars.
How low-interest rates help sellers
Again, I probably don't even need to explain this. Historically low rates cause a buyer frenzy, pushing home prices up along with quick sales.
The only detriment is that if the sellers have to purchase another home, they will also be paying high prices, and will possibly also be involved in bidding wars. They are now going to be buyers facing the same Seller's Market.
We sold 2 homes (a home in IL and a townhouse in Scottsdale, AZ), to purchase our new resale house in Cave Creek, AZ. The two properties we sold appraised for higher than list price, so we did great as sellers. However, the house we purchased did not appraise at the contract price, and the seller would only go down a certain amount, so we paid more than the house appraised for. But we intend to stay here for a long time, and with the Phoenix area being one of the fastest-growing places in the nation, we hope we'll at least break even if we downsize in the future.
How low rates help homeowners who aren't moving?
Homeowners that have higher interest rates on their current mortgage can save a lot of money on their monthly mortgage payment by refinancing. In fact, lenders have been making more refinance loans than new mortgages.
See the chart below to see how much money could be saved based on 3% & 4% interest rates and at different loan amounts:
Estimated Monthly Payment On a 30-Year Fixed-Rate Mortgage
|Loan Amount||4.0%||3.0%||Monthly Savings||Savings Over 30 Years|
Before taking out a refinance loan, be sure to check with all of the costs associated with it. Depending on the costs, you'll have to make sure you keep your home a certain amount of time in order to break even or come out ahead. Use this refinance calculator to see if this is something you should do.
Another benefit of low-interest rates for homeowners that don't plan on moving is that you can see if you qualify for a home equity loan to be able to use the money for some needed updates or to get money out of the house for other financial reasons. But be careful with this type of loan. We've seen people use their homes like a bank to get "free" money, and when they go to sell they owe too much. Some short sales had to be done for this reason.
So how can you be sure to get the lowest mortgage rates out there?
1. Take out a 15-year mortgage - if you can afford the higher payments, this is a way to get the lowest rates available. Even if some people can afford the higher payments, they prefer not to be forced to make them. They prefer to go with a 30-year mortgage just in case something happens in the future to a job or sickness, or other financial issues that could occur. So keep that in mind if you decide to go with a 15-year mortgage.
2. Make sure your credit is in tip-top shape - many buyers are unhappy when they see a lender's website showing current interest rates and are told they don't qualify for those low rates because of their credit. This is why you should speak to a lender before you go house hunting. If there are credit issues, your loan officer will tell you how to fix them.
It doesn't always take years to fix your credit. I've worked with many buyers that did what they were told and came back to me in less than a year ready and qualified to make a purchase.
3. Increase your down payment - I know some buyers want to keep money aside for furniture, repairs, and/or upgrades to the house they're purchasing. But if you're looking for the lowest rates possible, and you have the cash, consider putting 20% down. That will also save you from paying Private Mortgage Insurance (PMI).
4. Pay discount points - If you have the cash, you could opt to pay down your interest rate by paying discount points (a point is 1%). You'll need to do the math on this one to see how it will truly benefit you in the long-run. Your lender can help you figure this out. In today's competitive Seller's Market, you might not have the additional cash to even consider this.
5. Check out different lenders - but be careful. There are Internet lenders that offer super low rates but when it comes down to it, the buyer ends up paying more. Some listing agents will suggest to their sellers not to accept an offer with an unknown Internet lender.
I will give you some excellent, local lenders. We don't get money from these lenders, we get great service with good rates for our clients, constant communication, and on-time closings.
Did you know if you have to ask for an extension on the closing that the seller doesn't have to give it? That rarely happens since the seller would have to start over from scratch to find another buyer, but some sellers get so angry if a buyer can't close on time that they refuse to extend. Usually, a lender can't close on time because the buyer took too long to get the required paperwork. But for some reason we've worked with some of the big banks that just can't close on time, so be careful using one of them.
Call Judy Orr at 708-536-8200 to get some great local Scottsdale Arizona lenders. That should be your first step to making a real estate purchase.