Low Interest Rates Equal More Buying Power

Posted on Tuesday, October 13, 2020

You probably know that low interest rates mean lower monthly payments, but did you know that they also affect your buying power? It’s true. Lower interests could allow you to buy a more expensive home in Sierra Vista than you originally thought while keeping your monthly mortgage payments reasonable.

What is buying power? Simply put, it’s how much home you can afford. When interest rates are low, buyers can often afford to take out a larger mortgage based on their income.

In September, Freddie Mac reported that the average for a 30-year fixed interest rate reached 2.90 percent. The rate was 3.64 percent a year ago. The 15-year fixed-rate average reached 2.40 percent compared with 3.16 percent a year ago. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 2.96 percent. Last year, it was 3.38 percent.

What does that mean for your buying power? If you were to take out a 30-year loan, with 20 percent down, you might be able to afford a home valued at $400,000 and pay an average of $1,500 per month (not including taxes, insurance, or HOA fees).

That means you could afford a bigger home or load up your dream home with options and upgrades. Alternatively, you could qualify for a 15-year loan instead of a 30-year loan for the same or slightly higher monthly payment. Doing so, means you could own your home outright in less time and build equity much quicker.

Home equity is the amount of your home that you actually own. It is calculated by subtracting your mortgage balance from the home’s market value. Equity grows as you make your monthly payments. It is important because this represents a reserve you can draw on. Lenders often set borrowing amounts based on the amount of equity you own.

With a 15-year loan, you are paying more toward the principal, so you can pay off the loan faster. In doing so, you are building equity much faster than someone with a 30-year loan. How is that advantageous? It can help you get a substantial home equity loan or, if you decide to sell, you will receive more money that could be used to buy a more expensive home.

The bottom line is that buying a new home can actually save you money over the life of your loan. If you want to see what your buying power can net you, visit Sierra Vista today.


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