Interest Rates Make A Big Difference on Your Real Estate Purchase
by Dan Wolf
on Monday, May 28th, 2012 at 9:21am.
When I went to real estate school in Anchorage Alaska to learn to sell homes and condominiums in 1983, mortgage interest rates had been been 12 and 13 percent in the past years. I remember the teachers and seasoned real estate licensees telling the class that interest rates under 10 percent was good for business. "As long as rates remain under ten percent, real estate will sell and the market will remain strong", they said.
Fortunately for my career, and completely outside of my control or knowledge, interest rates slowly decreased over the next 30 years. For conversation purposes, let's assume a $200,000 loan and look at the difference in the principal and interest portion of the monthly payment. My example is simplified for illustration purposes. In real life, there are more factors to consider.
A $200,000 mortgage at 10% interest for a 30 year loan: Monthly principal and interest payment, called P/I, not including mortgage taxes or insurance would be $1,755. A family would have to show monthly income around $5,500 per month to qualify for this payment.
A $200,000 mortgage at 7% interest for a 30 year loan: Monthly payment of P/I would be $1,330. Borrows would have to show monthly income of $4,158 to qualify for this home or condo.
A $200,000 mortgage at 4% interest for a 30 year loan: Monthly payment of P/I, without taxes or insurance, would be $954. A buyer at 4% would need to demonstrates monthly income of $2,985 to qualify for this loan.
Interesting, isn't it? So, families can get the same loan with less income, leaving monthly money for other things like savings, travel, cars, toys and home improvements. Of course, houses tend to go up over time so the home back in 1980 probably cost 50% more in 2010 and would be about paid for if the owner didn't extract money if they refinanced the house.