Author: Bob Gerlach, Vice President and Manager of Alain Pinel Realtors Palo Alto
As I’m sure you’ve heard interest rates are at record lows. Today, a new home owner can get a fixed rate loan in the low 3% range or a variable rate loan in the high 2’s. If someone had told me that interest rates would be this low, I wouldn’t have believed them!
Since rates have been a bargain for some time, it seems to have desensitized us to the fact that this is a unique opportunity for homeowners that has a huge impact on affordability. And… based on historical data, these rates may not be around forever.
Let me add some context to this – when I started in real estate industry in the 1970’s, interest rates hovered around 10-12%. In the early 1980s, I saw interest skyrocket to above 15%! I remember one sale in particular that we closed at 18% – and the buyer was thrilled that they didn’t have to pay 20%. According to Freddie Mac, the average interest rate in 1981 on a 30-YR, fixed-rate mortgage was 16.63%. That’s almost 4 times as high as rates are today.
Below is a graph that tracks the interest rate from the early 1990’s to present day.
As you can see, this clearly indicates that our low rates today are uncommon. If we look at it from a historical perspective, interest rates should start to creep back up over time. If this does occur, it could have a significant impact on a buyer’s borrowing power.
What impact does an interest rate increase actually mean to the consumer? Let’s look at an example – a $1 million 30-YR, fixed rate mortgage with average interest rates from 1980, 1990, 2000, 2010, and now.
Today’s monthly payment on a $1 million loan is reduced by nearly half from 1990. Over the course of the mortgage, this results in over $1.3 million in savings on interest. Even if you only look back just two years to 2010, you save $700 on your monthly payment – resulting in over $250,000 savings over the mortgage.
Let’s look at this a different way – let’s say your budget allowed for $7,372 in monthly payments. In 2000, you would only be able to take out a $1 million dollar loan. With today’s interest rate, to have that same payment, you would have to have a loan of $1,647,730. That is an increase in purchasing power of almost $650,000. We aren’t talking about minor increases – today’s interest rates allow for a significant increase in what price home you can afford.
At Alain Pinel Realtors, we understand how rare these interest rates are and the very real affect they have on consumers. Contact your REALTOR® and see how much more buying power you may have today.
Chart is reproduced with permission from Mortgage-X.com. All average interest rate data is from Freddie Mac unless otherwise noted. This article recently ran in the Palo Alto Daily News publication Premier Homes.
Bob Gerlach currently serves as Vice President and Manager of the Alain Pinel Realtors Palo Alto office which has consistently been one of the top producing offices within the company. Bob started his real estate career in 1977 as a sales agent, yet quickly moved through the management ranks. For more information call Alain Pinel Realtors Palo Alto at 650-323-1111 or email at email@example.com.