Mortgage interest rates have had a choppy downward trend since May and are at their lowest levels in over a year with the popular 30yr mortgage averaging around 6.35% this week (August 29th), according to Freddie Mac.
So what does this mean for the prospective homebuyer?
When mortgage rates change, it affects how much you will pay each month for your home loan. Even a small rate change can make difference to your monthly bill, so it’s very important to stay close to your lender and understand how changes in rates can affect your purchasing power. In a falling interest rate environment, the lower cost of borrowing makes it easier for buyers to afford more expensive homes. Let’s dig in a little deeper with some real-world examples.
Let’s say you’re in the market for a home that will require a $400,000 loan. Had you purchased this home late in 2023 with a 30yr fixed rate mortgage, odds are you have a mortgage interest rate near or even higher than 7.5%. At 7.5%, your monthly P&I (principal and interest) payment would be $2,797. Today (8/30/24) we are hovering around 6.25% and the outlook is for lower rates in the months ahead, so let’s say you held off and were lucky enough to lock a rate at 5.75%. Your monthly payment would be $2,334.00, a difference of $463.00 per month. Real money!!
Let’s look at it from a monthly budget perspective now. Let’s say your monthly P&I budget is $2,600. At 7.5% your maximum loan size would equate to $360,000. As interest rates decrease, that potential loan size increases. At 5.75%, you could afford a $440,000 loan. That’s a difference of $80k in purchasing power which could land you in a larger and/or nicer home or in a different geography, perhaps a community with better schooling for your children.
Having a practical understanding of budgeting and purchasing power will afford you a less stressful homebuying experience. Do this strategic planning ahead of time so there are no surprises when you find your dream home. Reach out to me at Lakeside Bank with questions at your convenience, and happy house hunting!
Chart & Data Sources:
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