When buying a home in Sacramento – Your biggest financial concerns when purchasing a home are probably the asking price and the down payment. However, these are by no means the only expenses or even a significant portion of the overall budget. There will be other numbers to consider once you close. And foremost among these will be the effect your mortgage interest rate will have on your finances. Discover how important interest rates are when buying a home in Sacramento by reading on.
Why Interest Rates Matter
In other words, the amount you ultimately pay for your home and your monthly mortgage payment are both directly influenced by your mortgage interest rate. Let’s examine why and how interest rates affect the decision to buying a home in Sacramento.
“Suppose,” for example, “When interest rates were 4 percent, you began your property search. You noticed a condo with one bedroom listed for $100,000. You used the $80,000 you would be mortgaging after a 20% down payment and closing costs to compute your monthly mortgage payment over a 30-year period. You would pay $382 each month.”
If, however, you wait for interests to go down, that savings may very likely be offset by rising prices. A “condo in the neighborhood you want now costs $120,000. You put down 20% plus closing costs, and you are left with a mortgage of $96,000. Your monthly payment on a 30-year mortgage is $355. Your payment dropped by [only] $27.”
Mortgage rates effect more than simply the amount of interest you’ll pay over the course of your loan, which is why interest rates are so important to individuals who are purchasing a home. Your fixed rate significantly affects your ability to buying a home, or your “home buying power.”
How Interest Rates Affect Your Buying Power
So let’s see how interest rates impact your buying power when buying a home in Sacramento . . .
In August and September of 2019, interest rates reached essentially record lows. “The 30-year fixed-rate mortgage’s low point in September was 3.5 percent. A home worth more than $400,000 might be purchased at that rate for only approximately $1,500 a month (not including taxes, insurance, or HOA fees). With the same monthly payment a year ago, when interest rates were above 4.6 percent, you could have purchased a home for less than $375,000.
In fact, specialists in the field claim that “your buying power can increase or decrease with each 0.125 percent fluctuation in mortgage rates.” Because of this, they also insist that now is a good time to buy before rates increase even further, even though interest rates are still low but rising. For advice on regional markets and the ideal time to purchase, contact a Sacramento representative at (916) 507-2502.
An Example for Buying a House
So now let’s look at an illustrative example to see how interest rates matter when buying a home.
A mere 1% drop in interest rates could save you $30,000. “A 1% point drop in rates – such as from 4.5% to 3.5% – leads to a monthly savings of $167 on a $200,000 mortgage. Consider this example . . .
“A home buyer named Steve has a monthly gross income of $5,000 and an expected total monthly debt of $2,250. His debt-to-income ratio is 45%. Steve takes out a 30-year fixed loan of $250,000. At 4% interest, his monthly payment for principal, interest, taxes, and insurance . . . would be $1,193.”
But what if Steve was able to get a mortgage interest rate of 3.5% instead?
“That rate decrease of a half percent increases Steve’s purchasing power by $15,000; that assumes $1,122 is the maximum payment he can afford . . . If Steve’s rate was 3%, it would lower his monthly payment to the amazingly low sum of $1,051. That boosts his buying power by $30,000.
What It All Means
As you are aware, interest rates have a direct impact on the amount of your monthly mortgage payment when purchasing a home. But did you realise that the majority of your early mortgage payments go solely to interest and very little toward the principal?
“Early on in a typical 30-year mortgage, more than 95% of a buyer’s monthly payment goes toward interest. The lower the mortgage rate, the lower the amount of interest that needs to be paid. And the lower the monthly payment, the more affordable the home is on a month-to-month basis.”
Here’s what it all boils down to: “[I]f you can afford a certain monthly payment based on your income, you can afford to take out a larger mortgage if interest rates are lower.”
The Final Step Toward Buying a Home
Anyone purchasing a home should be concerned about interest rates. Unfortunately, interest rates are now rising from their recently reached almost historic lows. Finding a home at the right price is therefore even more crucial. Your best hope for locating a house that is priced reasonably for your financial circumstances is to work with an experienced local agent. So be sure to get in touch with us right away at (916) 507-2502 if you’re considering buying a home in Sacramento.