These high interest rates may be daunting until you look at the numbers.
Interest rates are on everyone’s mind right now. When discussing this topic, I think it’s very important to put things in a historical perspective as well as a numbers perspective. To help me do that, I created a chart, which you can see at 0:19 in the video, that showed what a $500,000 purchase looked like in 2021 with a 3% interest rate and what a $500,000 purchase looks like in 2023 with a 6% interest rate.
In 2021, a $500,000 home was typically selling for over the asking price. For illustration purposes, I put a home listed at $500,000 that was selling at $525,000, which is about 5% over. We all know homes were selling even more than that over asking. If you look at how the numbers break down, with the $525,000 purchase price and a 3% interest rate, the monthly payment was approximately $1,770 for principal and interest.
For 2023, I showed what a $500,000 house looks like at a 6% interest rate. I put the sales price at $475,000, 5% off of asking because people are negotiating more these days. There’s potential to get even more off the asking, but for illustration purposes, let’s be consistent with 5% below asking, which puts our price at $475,000. After your 20% down payment, your monthly principal and interest is approximately $2,278 per month. On the surface, purchasing the same home in 2023 is roughly $508 more per month, or about 29% more monthly payment in terms of principal and interest.
“It’s very important to put things in a historical perspective as well as a numbers perspective.”
If we go deeper into the numbers, the same home will cost you $50,000 more at the time of purchase in 2021 versus 2023. While $508 per month is significant, $50,000 upfront is more significant. If you do the math, it would take 98 months or approximately eight years for you to recover the $50,000 while saving $500 a month. When evaluating opportunities, you have to look at the short term but also the long term and what these numbers actually mean.
What are some solutions for these high interest rates? You could pay additional points to buy down your interest rates, which are some upfront charges that will lower your interest rate. This will save you money in the long run.
Another option you can consider is an adjustable-rate mortgage, which has a fixed interest rate for five to seven years and then adjusts after that. People have been getting 30-year fixed mortgages for the last few years because the rates have been so low that it’s too good to pass up. However, an adjustable-rate mortgage may be considered in this environment because the rates tend to be lower. Also, on average, people live in homes for five to seven years. So while a 30-year fixed mortgage sounds good on paper, you may never live in that home for 30 years to take full advantage of it.
Lastly, you may even consider putting in a larger down payment of 30% or more. 20% down has been a standard for some time because that typically gets you really good interest rates with no PMI. However, some lenders offer even better rates with 30% down, with the stock market and other investment opportunities being a little bit here and there at the moment. This will result in a lower monthly payment and a lower interest rate for you and your family.
If you have any questions about this topic or real estate in general, be sure to call or email me. I am happy to help with all of your real estate needs.
