How much your monthly mortgage payment will be is often one of the primary factors in deciding how much of a home you can afford. Today I want to look at how interest rates effect how much you pay for a home. Understanding how current mortgage rates effect price can substantially improve the quality of home you purchase without compromising your financial security.
Mortgage Payment and Interest Rates
Interest rates are at historically low levels, and 3.5% is a good fixed 30-year rate. Any rate under 4% is pretty amazing. This is more significant than many people realize. I remember when the interest rate on a 30 year loan was 11%, and you may remember this:
As Jimmy Carter stepped before the television cameras . . . his task was not just to proclaim another new anti-inflation program but to calm a national alarm that had begun to border on panic. Inflation and interest rates, both topping 18%, are so far beyond anything that Americans have experienced in peacetime—and so far beyond anything that U.S. financial markets are set up to handle—as to inspire a contagion of fear. [Time Magazine, March 24, 1980, read Jimmy Carter v. Inflation]
Mortgage Payment Comparison
We love low interest rates, but here’s how incredible 3.5% is for buyers today. Let’s do a quick comparison on a $300,000 loan with a 30-year fixed rate loan at several different rates.
At 11% the monthly mortgage payment was $2,857
At 8% the monthly mortgage payment was $2,201
At 6% the monthly mortgage payment was $1,799
At 3.5% the monthly mortgage payment is $1,347
Wow! What a different a few points can make on a mortgage payment! This is why I have emphasized in previous articles the extraordinary significance of these low interest rates for buyers.
I share this analysis, because the majority of retirees who move to Sequim find that the maximum price they want to budget for their ideal home is often just short of the price of the home they really want. Among hundreds of retirees I’ve worked with over the past 18 years in the Sequim and Port Angeles areas, many find that the home they want is $20,000 to $50,000 more than their preset maximum price.
Your Mortgage Payment and Quality of Life
A lot goes into financial planning for retirement, and a preset maximum price may have a lot of solid planning behind it. That I do not doubt. My point here is that with interest rates so low, we should consider adjusting the financial planning template we used when mortgage interest rates were much higher. Now with such low rates, and therefore with the possibility of a low mortgage payment, retirees can afford to increase the purchase price of their home a little, and end up with the retirement home they really want. Many retirees tell me their retirement home in Sequim or Port Angeles will be their last home, and they tell me that they are willing to pay $20,000 to $50,000 more and have the perfect home for the last years of their lives. At such low interest rates, this makes more sense now than it has in three decades.
I believe everyone should do careful financial planning, and never exceed one’s financial ability to manage income and expenses into the retirement years. But I also see many clients wanting the ideal retirement home, which is a little more than they budgeted before they arrived here to look at homes. Most of us tend to think of what we can afford based on the interest rates we’ve observed most of our adult lives. I believe interest rates will go up soon and never reach these low levels during our lifetimes again. So this is what you could call a “window of opportunity” for retirees at this point in time. It will pass soon. This could mean that right now you can afford more of a home than you originally planned. It could also change the way you negotiate for the perfect home. You may not want to walk away from a negotiation if it means you get the the home you really want for only $45 more per month in your mortgage payment.
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