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July 21, 2017

Low Rates = High Purchasing Power

Homeownership

While it's not likely that the average 30–year fixed mortgage rate will return to its all–time record low in 2012 of 3.13%, mortgage rates are still low compared to almost any year since Freddie Mac began tracking rates in 1971 (when they averaged just below 9%). This week the average 30–year fixed mortgage rate moved down to 3.96%.

Many buyers are aware of the impact rates have on their housing costs — the lower the rate, the better. But why? Two reasons: affordability and purchasing power.

When purchasing a home, buyers must consider how much home they can afford based on their budget. Simply put, lower mortgage rates make homes more affordable for buyers, which increases their purchasing power — the financial ability to buy the home. In fact, if it wasn't for today's low mortgage rates, affordability would be severely challenged in most markets across the country. House prices are rising at twice the pace, or more, compared to wage growth.

The chart below provides examples of monthly mortgage payments on a 30–year fixed–rate mortgage with a 10% down payment. Note the impact that the lower rates have on higher priced homes. For example, a rate of 3.75% on a $400,000 home puts the monthly mortgage payment at $1,667, while a higher rate of 4.75% on a less expensive home at $360,000 is $23 more per month at $1,690.

RATESHOME PRICES
 $400,000$390,000$380,000$370,000$360,000
3.75% $ 1,667 $ 1,626 $ 1,584 $ 1,542 $ 1,500

4.00%

$ 1,719 $ 1,676 $ 1,633 $ 1,590 $ 1,547
4.25% $ 1,771 $ 1,727 $ 1,682 $ 1,638 $ 1,594
4.50% $ 1,824 $ 1,778 $ 1,733 $ 1,687 $ 1,642
4.75% $ 1,878 $ 1,831 $ 1,784 $ 1,737 $ 1,690
5.00% $ 1,933 $ 1,884 $ 1,836 $ 1,788 $ 1,739
5.25% $ 1,988 $ 1,938 $ 1,889 $ 1,839 $ 1,789

Source: Mortgage payments are based on a 10% down payment and show principal and interest only on a fully amortizing mortgage. All terms are assumed to be 30 years

Buying a home is a big investment — perhaps the biggest one you'll make in your life. So, it's important to be sure you are ready to make that purchase. If you are ready, today's rates are not to be missed.

For more information and tools on buying a home and homeownership, visit Ready to Buy.

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