3% vs. 5% vs. 7% – Navigating the Real Estate Math in Today's Market
You may have heard that changing market conditions have created a seller's market that's forcing buyers to spend a lot of money. People in many areas are experiencing housing shortages that make the seller's market strong. When you don't have enough supply to meet demand, you can expect to pay higher prices. Changing market conditions can make it challenging to purchase real estate right now. They don't make it impossible, though. As the Fed looks to increase interest rates again, you need to work closely with a real estate agent and mortgage broker that can get you a fair deal. You won't believe how much money you save when you lower your interest rate by a small amount. Of course, it helps to have a real estate professional searching for ways to lower your interest rate! How Much Does Your Interest Rate Affect Home Prices? The average home price in the United States is about $507,800. Obviously, real estate prices can differ significantly by location. For simplicity's sake, let's assume you want to buy a house that costs $500,000, and you have $100,000 for your down payment. At 20%, $100,000 should mean you don't need to pay private mortgage insurance (PMI). You're borrowing $400,000 to purchase the home. How much will interest rates affect the full amount you pay before you own the house? 7% Interest Rate If you get a 30-year fixed-rate mortgage with a 7% interest rate, you can expect to spend $958,035.59 plus the $100,000 you used as a down payment. This amount does not include insurance, property tax, and other expenses. That's right. Your $500,000 house now costs nearly a million dollars. How does that happen? Over the years, you paid a total of $558,035.59 in interest. You spent more money on interest than the actual property! 5% Interest Rate In this scenario, everything stays the same, except you qualify for a 5% interest rate. You might not think that 2% seems like a lot. The numbers say otherwise. With a 5% interest rate, you spend $373,023.14 on interest and a total of $773,023.14 buying the home. Lowering your interest rate by 2% saves you $185,012.45 over 30 years. Think about all of the things you can do with that much money! 3% Interest Rate In today's real estate lending market, you will struggle to find a mortgage that only charges a 3% interest rate. It isn't impossible, but it's becoming increasingly unlikely as the Fed raises its interest rates. Still, let's assume that you can qualify for a 3% interest rate to see how much money you would save. At 3% over 30 years, you would pay $207,109.81 in interest. The total purchase, not including your down payment, comes to $607,109.81. Compared to a 7% mortgage, you save nearly $351,000. You save almost $166,000 compared to the 5% mortgage. Know What You Can Control You can control some factors easier than others when you buy a home. For example, you can probably get a lower interest rate by saving money for a larger down payment and working to improve your credit rating. In the end, your lender will choose the rate, though. You also don't have much control over home prices. In a seller's market, you can expect to pay above the asking price. However, you can control how much money you pay toward your mortgage each month. As long as your lender doesn't charge an early repayment penalty, you could save a lot of money by making a small additional payment each month. By contributing an extra $100 per month toward your mortgage, you save: $72,851.78 on a 7% mortgage $41,552.74 on a 5% mortgage $20,087.25 on a 3% mortgage You will also repay your loan a couple of years earlier than scheduled. It feels really good to get out of debt and own your home outright!
When Will Home Prices Come Down?
As the market continues to shift, more and more questions are being asked about how home prices will behave in the coming months. Will home prices continue to rise, or will they finally start to come down? If you’ve been interested in selling your home and/or buying a new one but have been intimidated by the fast-moving market, you’re in the right place. This post will explore real estate market conditions and when we may start to see home prices drop. Rising Interest Rates: What They Mean for the Real Estate Market The cost of buying a home skyrocketed by more than 20% across the country in April of this year compared to last year. In some cities, that number was even higher, including: 34.8% in Tampa 32.4% in Phoenix 32.0% in Miami The red-hot real estate market conditions were caused by a few factors, including the Covid-19 pandemic and ensuing Great Resignation, limited inventory, and historically low interest rates. Interest rates are now on their way back up — while this may not sound like the best news for home sellers or home buyers, it does mean the market has started to settle. In fact, rates are expected to rise to 5.7% by the end of the year. These increased costs are putting pressure on the housing market. According to the Mortgage Bankers Association, there has already been a steep drop in mortgage applications. The drop was so significant that it pushed the market index down to its lowest level since 2000. About 20% of home sellers dropped their prices during the month of May, but that doesn’t signify a serious shift in the market quite yet. Although the real estate market conditions are cooling, that doesn’t mean you can expect significant drops in home prices overnight. Most experts agree it will be at least 2023 before we see home prices drop. Will the Housing Market Crash? There have been a lot of murmurings online and in social circles that we may be heading towards another 2006-style housing market crash. Most experts are not anticipating this kind of “bubble burst.” Instead, Capital Economics predicts we’ll see a 5% drop in home price growth by the middle of next year. Then, they expect a gradual recovery to happen to 3% annual price growth by the end of 2024. Should I Wait for Real Estate Market Conditions to Improve? Since there are no signs of a chaotic downturn in the housing market, if you are interested in selling your home, you should not wait. Start the process now! Remember, there’s a lot that goes into selling a home — getting it deep cleaned, de-cluttered, and staged, fixing broken appliances and cosmetic issues, finding a real estate agent, listing the home, preparing the home for showings, having an inspection and appraisal and fixing issues these processes find — and the list goes on. If that list seems excessively long, it’s because the process can be arduous. So, there’s no need to wait. Get ahead of it and get started now! As the market slows down, it is taking longer for homes to sell — they are still selling fast, but we’re not seeing people lined around the block, and multiple above-asking price cash offers roll in like we were a few months ago. If you’re a home seller, it’s also important to list your home before the real estate market conditions change and prices drop. This is key so that you can make the highest profit possible on your home. If you wait too long, you risk missing out on full-price offers that will likely be a thing of the past when the market changes later this year and into next. The bottom line is that continued supply shortages and high buyer demand mean that now is a great time for home sellers to list their homes before prices start dropping significantly as interest rates continue to rise.
Homebuyers: Know These 6 Things to Navigate This Market
Is the seemingly never-ending era of the seller's market finally over? Can home buyers finally breathe a sigh of relief as they navigate an ultra-competitive housing market? To say that the housing market has been volatile over the past two years would be a gigantic understatement. The pandemic created a perfect storm of factors. A supply and demand mismatch and skyrocketing home prices have been tough for buyers. Is change afoot, and what are the main things every homebuyer needs to know right now? 1. More home listings don't mean lower home prices The reality is that home prices are continuing to rise, with no indication that they're about to start falling. While the pandemic-era trend of record home price growth is likely over, this does not mean that home prices are about to crash. Buyers can expect cooler real estate market conditions, with home prices increasing at a more sustainable rate. So, instead of the near-20-per-cent year-on-year increases, expect something closer to seven or eight percent, as the latest Zillow market forecast points out. 2. Ultra-low-rate mortgages are no more The era of historically low mortgage rates has ended, with mortgage interest rates now having crossed the five percent threshold. Mortgage rates will not return to the all-time low rates homebuyers enjoyed pre-pandemic, and anyone buying a home right now should be aware that their monthly repayments will be higher than if they had done so even a few months ago. 3. Homebuyer competition is still high You may see headlines suggesting that as interest rates rise, there will be fewer buyers on the market as mortgages become more expensive. This isn't currently the case - the market is still incredibly competitive. There are some factors at play in making the housing market so pressured, with demographics playing a key role. An enormous number of millennials are currently attempting to secure homes before interest rates rise even further, which keeps competition for homes high. As Redfin real estate experts report, record numbers of homebuyers are relocating to affordable areas, keeping the market competitive. 4. There are signs that the market is slowly rebalancing This is another way of saying that the seller's market conditions that have dominated the housing market throughout the pandemic are finally giving way to something more resembling an equal market. The number of new instructions is steadily rising, narrowing the supply-demand chasm that had fueled unprecedented market conditions for so long. 5. Home sales are on the increase Home sellers are continuing to slowly come back to the market. The wait-and-see strategy of the pandemic, where a lot of home sellers were holding back from listing their homes, is now definitely coming to an end. Aware that soon enough, the number of home buyers will begin going down, home sellers are finally taking the plunge and putting up their homes for sale. Again, as with the other market conditions, this is a slow change, and there still is a deficit of new listings. However, the overall trend is toward an increase in the number of homes for sale. 6. An immediate economic downturn is unlikely Home buyers are worried about purchasing a home because of fears of a 2008-style crash needn't fear. There are no indications that the rising interest rates will cause an economic downturn. If homebuyers are hesitant to make a home purchase because they fear layoffs and/or unemployment, this factor is unlikely to come into play for several years yet. Some expert economists are detecting early warning signs of a potential economic turn circa 2026, and Business Insider reports that bank executives believe the housing market will follow suit. However, homebuyers ready to purchase should make decisions based on their current unique circumstances. There is no immediate danger of a crash that would bring a collapse to housing market conditions right now.
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