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!
Let Real Estate Math Benefit Your Search
Real estate can feel incredibly confusing when you need to navigate changing marketing conditions and fluctuating interest rates. Reach out to your real estate agent today for expert advice. It never hurts to get a professional's insight into how real estate math can benefit your search!
Rachel is a very knowledgeable realtor
Rachel is a very knowledgeable realtor. She is very patient, accommodating and willing to help in any way. We sold and bought a home with her and would highly recommend The Mooney Group!
Rachel is top notch, very knowledgeable and detailed.
Rachel is top notch, very knowledgeable and detailed. If you are buying a house I would HIGHLY recommend using her to find your perfect home. We moved from West Midtown to Roswell, I had my doubts about finding the right fit - but Rachel did it and now we love our home more and more every day. Happy New Year & Good luck on your search.
We will definitely recommend her
We were first time sellers, needing to sell our house quickly. Rachel was quick to get our house listed professionally and with great pictures. Unfortunately, we had a lot of obstacles with buyers along the way which kept us from a quick sell but she helped us navigate each of them and made the process so much easier and helped minimize the stress! She was always quick to respond to any questions we had and really upheld our wishes when it came to showing the house and working within our schedule. We will definitely recommend her to all of our friends and if we hadn't moved out of state we would use her again!