3 Reasons to Leverage Low Mortgage Rates Now Rather Than Pay Later
Financial experts disagree on a lot of things, but one item most universally agree with is that it’s a poor idea to time the market. This saying holds true for many markets, including real estate, especially when you are looking to purchase a new home.
Most new buyers looking to purchase real estate will need to finance their purchase using a mortgage loan. While not a lot of good has come out of the COVID-19 pandemic, the silver lining for prospective homebuyers is that mortgage rates are near record lows and are projected to remain low for the foreseeable future.
But while many homebuyers are testing the waters, waiting to see if mortgage interest rates will drop even lower, you may be risking your chance to capitalize on an already lucrative real estate market. If you are considering buying a new home, here are some reasons why you should leverage lower mortgage rates now rather than wait and pay more later.
Lower Your Overall Interest Expense
Most buyers understand that a lower interest rate is more favorable than a higher interest rate, all things considered. But what most don’t understand is just how a lower interest rate can save you money.
Obtaining a mortgage with a lower interest rate right from the get go will save you money in terms of how much interest you will pay over the life of your loan. For example, for a $250,000 30-year fixed rate mortgage, you would save approximately $50,000 in interest if you locked in a rate at 3.00% as opposed to 4.00%.
But more importantly, starting out with a lower interest rate can save you money in other ways. For example, if your loan has a higher interest rate and mortgage interest rates drop, you then have to spend more time and money to refinance your mortgage if you want a lower rate. Rates are already near record lows, hitting 2.86% in early September 2020, which is the lowest recorded rate for the 30-year fixed rate mortgage on record according to aggregator Freddie Mac1. Even if rates decrease slightly, the cost to refinance may outweigh the savings you would reap.
Keep in mind too that interest rates really have nowhere to go but up.
Increase Your Purchasing Power
Buying a new home is certainly a long-term investment which means when you are going through the purchase process you want to get the most home for your money. Getting a lower mortgage interest rate translates to more purchasing power, essentially broadening the scope of the number of homes you can afford.
Consider the same scenario where you obtain a 30-year fixed rate mortgage for $250,000 at 3.00%. Your approximate monthly principal and interest payment would be $1,054.01.
Comparing this to where interest rates were even a year ago, the same $250,000 30-year fixed rate mortgage at 4.00%, keeping your payment and other terms the same, would result in a decrease of almost $30,000 in purchasing power.
Payoff Your Home Faster
Not only can a lower mortgage interest rate increase your purchasing power and lower your overall interest expense, but it may also enable you to pay off your home even faster.
If your budget can handle it, consider optimizing a shorter mortgage term to get an even lower interest rate. The average 15-year fixed rate mortgage hit 2.37% in early September 20201. While a shorter term means a bigger monthly payment, it can save you money long term.
Also consider paying any buydowns or discounted points to lower your rate even further if they are available. While there is an upfront cost, you may be able to save more money long term. Make sure to discuss all your options with your lender before finalizing any new credit application.
With the current trends in the real estate market, it’s a great time to connect to discuss the market in our area. Connect with me today to discuss your options to make it work for you! Buyer Guide
Jennifer Lockwood | 203.650.6870
1 Orton, Kathy. “Fixed Mortgage Rates Tumble to Lowest Levels in History.” The Washington Post, WP Company, 10 Sept. 2020, www.washingtonpost.com/business/2020/09/10/fixed-mortgage-rates-tumble-lowest-levels-history/.