Last month I mentioned I’d be talking about “making an offer” in this month’s Real Estate 101, but instead I decided to veer off topic a bit and talk about something else as we come to the end of Q2 (Second quarter) and roll into the summer months. I want to take moment to address some things that I feel all my clients should, and need, to know.
Let me share a few things you may not have realized.
First of all, if you weren’t already aware of it (if you’ve followed my writing you should be) INTEREST RATES HAVE NEVER BEEN THIS LOW IN OUR ENTIRE LIFETIME!!!
Just how low varies depending on the bank, but my new in-house lender, Bank of Manhattan, is now offering 3.375% on 30 year fixed conforming loans up to $417,000, and 4.125% on 30 year fixed jumbo loans up to $1,500,000. Try getting a credit card that offers that kind of interest rate.
I cannot stress the importance of a low interest rate enough, but I do not want people to think I’m writing this as a marketing ploy. I’m not. I’m writing this to educate my friends and potential clients, thus the title Real Estate 101. So let me take a moment to explain just how important it is to lock down a low interest rate.
Most home purchases are done on debt. A LOT of debt. The buyer puts down anywhere from 0-20% on the overall price of the house. The lender, or bank, covers the rest. That lender is “banking” on you to pay off this debt over time, 15-30 years in most cases. They get their money by charging you interest on the debt owed.
Most buyers tend to focus solely on the PRICE of the house. What they should be concerned about is the overall COST to buy the house. What’s the difference? PRICE is simply the actual price tag the buyer pays the seller for the home. It does not take into account any financing costs. COST is what a buyer will pay for a home overall, including interest rates accumulated over the lifetime of the loan.
While buyers wait months for home prices to hit rock bottom, interest rates can rise. And higher interest rates will definitely effect a buyer’s overall purchasing power and monthly mortgage amount. For example, on a $400K loan, the payment increases $190 a month when the rate jumps from 4% to 5%. That’s nearly a car payment for some families and that’s without including property taxes and PMI (private mortgage insurance).
When you consider the entire life span of the loan, the total paid on INTEREST ALONE for that same $400K loan at a 4% interest rate is $229,982. At 5% it is $298,418. That’s $68,436 over a 30 year period with the interest rate having increased only 1%. Thinking of purchasing an $800K house. Double all those numbers.
Want to see for yourself? click here.
Higher interest rates will also affect any current purchase offer and loan approval that a buyer may have. So for someone looking in the $400k range now with a rate 4%, that same monthly payment will only get a home for $360k if the rate increases to 5%.
Lastly, I want to break the long standing idea that you need to rely on a 401K or savings account to retire. That is not true. What you do need when you retire is steady income coming in each month. If you’re not working, that means Social Security or money from investments that you’ve made throughout your life. Right now with low interest rates and a market of short sale homes and foreclosures, investing in income property right now is a SMART INVESTMENT.
So here are four simple questions I have for you as we enter Q3:
1) What does your real estate portfolio look like?
2) What are your real estate goals for this summer?
3) How can I help you with your real estate needs?
4) Where do you want to be at the end of Q3?
Please do not hesitate to call me with any questions you may have. 310-722-5959.