Financial Facts: Lower interest rates equal more buying power
The Federal Monetary Board has allowed the interest rate to bank drop to a historic low. With the low rates it simply means more buying power to all of us.
As an example, early last year some good friends and clients of mine purchased a new home. The interest rate they received on their new 30-year mortgage was 5.5 percent on a $400,000 mortgage. Their monthly principal and interest payment was a bit over $2,261. With the new lower interest rates they have decided to refinance the mortgage, as they can now get a 4.5 percent mortgage for their new home. At 4.5 percent, the new payment will be $2,019 a month. That equals a monthly savings of $242.00 – an annual savings of $2,901. That is definitely worth the refinance costs.
Also, with the lower interest rates, I am seeing homeowners refinancing to utilize the equity in their homes and to reduce or eliminate car payments, credit card payments and even to make home improvements. As a further example, I am working with a borrower consolidating all of their debt into a new mortgage and eliminating all debt excluding the mortgage. Two things are happening with this refinance: One, all the interest paid is now tax-deductible and at a much lower rate than they are currently paying. And two, the new mortgage, even with all the additional debt, is $700 a month less than all of their past debt payments.
For potential homebuyers, look at the lower rates as a way to buy a more expensive home. If at 5.5f percent you could afford a mortgage of $400,000, at the lower rates of 4.5 percent you can now afford a mortgage for $450,000 with the same payment. The one percent drop allows you, the buyer, to look at more expensive homes. Now this might sound like I am trying to talk you into a more expensive home, and I am trying to do just that. Look down the road to when you sell the home. If you make a 20 percent downpayment on a $500,000 home and the home appreciates just 4 percent per year over five years, you have a return on your investment of $100,000 of almost $85,000.00.
So take advantage of the low home mortgage rates and either refinance to a lower rate or buy a bigger home. It is a wise decision and will put money in your pocket in the long run. And who more do you want to profit from a wise financial decision than yourself?
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