Interest Rates: What Are They and Why Are They So Important?

Whenever you hear people talking about the real estate market, one of the first things to come up is the current interest rate environment. For the last 2 years everybody has been shouting about low rates and how they are driving insane buyer demand which is lifting prices to record numbers. But why exactly are interest rates so intertwined with the housing market?

On a $600,000 home purchase, a 0.5% increase in interest rates can add about $150 to your monthly payment. That’s $1800 per year or $54,000 in additional interest over your 30 year loan. For perspective, you would have to put down an extra $30,000 or so to see that kind of change in your monthly payment. Interest rates are a huge part about what drives the market, so we need to know where they are and where they are heading at all times!

Low rates also mean that buyers can afford more house, while keeping their monthly payments low. Why? Because your monthly mortgage payment is made up of 4 things: Principle - which goes directly towards your equity in the house, Interest - which actually makes up the largest chunk of your early mortgage payments, property taxes, and home insurance. When you get pre-approved for a mortgage, the lender is going to be calculating what monthly payment they’re comfortable with you making based on your monthly income and debts. That means that with low interest rates on the money that you're borrowing, you’ll be able to spend more on the sales price of the house and still stay within your pre-approved monthly payment. With interest being the largest portion of your early mortgage payments as you're trying to pay down the principle on your loan, even small changes in rates are the first thing to affect how much house you can afford.

This is why I encourage buyers to think about their home search in terms of their monthly payment FIRST, and then to reverse engineer the sale price budget from that monthly payment. What monthly payment do you get pre approved for? More importantly, what monthly payment do you feel comfortable making?

While rates have certainly gone up more than projected to start 2022, they are still just under 3.5% on a 30 conventional year fixed mortgage. That means that rates are still EXTREMELY low right now compared to historical averages, which means LOW MONTHLY PAYMENTS for buyers! For perspective, rates between 2000-2010 were in the 6%s - which is over $1000 more per month on a $600,000 home. Click this link to see the live mortgage rates which change daily! http://www.freddiemac.com/pmms/

Many buyers are scared of this market, not wanting to buy at the wrong time, but the fact is that borrowing money is probably never going to be cheaper than it is right now. It's a great chance to be able to afford your dream home for a monthly payment that you feel comfortable with! In all likelihood, when housing prices come down (if at all) it will probably go hand in hand with interest rates rising - which only means that you as the consumer will only be able to afford a lower sales price for your pre-approved monthly payment.