Who doesn’t want to get the best deal in buying a home or investing in real estate? What are the factors that make up getting a great deal, especially in the market we have today, August 2018? Is it the price? Location? Style of the home? Yes, Yes and Yes are the answer to those things, but there is one more thing that has a huge impact on what is paid for a home. Want to know what the secret is?
Before I tell you that, let me first say that if you are paying cash, then the price you pay and condition for a property in the best location available will matter the most. I am addressing the rest of us that will likely have to take out a loan. In Orange County California where I live, the Median Sales price across all property types is $560,000.
With 20% down on that median price gives you a loan amount of $448,000. As of this writing, if you had good credit and you are going to live in the home and put a 20% down payment, the interest rate would be at 4.375% for a no point 30 year fixed loan. The APR for this by the way is 4.411% (which includes the cost of the loan- aka APR)
Now I am going to mathematically show you the answer to what is the secret to a great deal in today’s real estate. The answer of course is INTEREST RATE. We have enjoyed an historic drop in interest rates over the last 7 plus years as the government stepped in and drove the interest rates to below market rates. At one point that rates bottomed at about 3.5% for a 30 year fixed loan. It has already gone up almost 1% so far from then and experts agree that now that the government is no longer a buyer of those bonds, but a seller of them, the interest rates are predicted to go up to the mid to upper 5-6% range in the next year or so. This of course is a return to the mean, as they say, as historic rate averages show that the average rate of about 6%.
Just ten years ago in 2008 the interest rate averaged 6.03% according to Freddie Mac. Twenty years ago in 1998 the average interest rate for 30 year fixed mortgages were 6.94% and even thirty years ago in 1988, the average rate for a 30-year mortgage rate was 10.34%
Now let me demonstrate why the secret to a good deal in real estate has everything to do with interest rate. Let’s take the same purchase price as above at the median sales price of $560,000 with 20% down giving you a loan amount of $448,000. If the interest rate were to rise just 1% from where it is today, you would now pay $4480 more each year for the interest you pay and a total of $134,400 over the life of the loan more. If the rates got back to the historical average of 6%, which is still a great rate by the way, then you about pay 1.625% more in interest of the loan amount, or $7280 each year and $218,400 over the life of the loan. Can you now see why INTEREST RATE MATTERS in buying real estate?
You might say, hey I am just going to wait for the market to pull back because it has gone up and up and up for ten years and the market is due for a pull back and I can get the house I want for a lower price! I agree that real estate values rise and come down in cycles. That is a fact. However, you would have to buy that same $560,000 house for $425,600 and interest rates only go up 1% from here or at $341,600 if interest rates go back to 6%. I would humbly submit to you that when the market does pull back, it will not be as extreme as this would need to be. You will still pay more for the home that what you would pay for it today with lower interest rates; The math doesn’t lie.
So what should you do? I would say that if you have been thinking of purchasing a home, then talk to your mortgage professional and get with a pro realtor that can lay out your options for your individual scenario. Even if you don’t have a full 20% down payment, you can still buy a home and take advantage of the low rates today! If you are in the Orange County California market, you can reach out to me for help and I can refer you some great lenders and answer any questions you might have.
I love real estate and working by referral. I would like the opportunity to earn your referrals and build a long-term relationship with you. Call me with your real estate questions at (714) 293-4786 or use my contact form in order to get the process of buying or selling your home started.
Mike Rains, Realtor
Huntington Beach, Orange County, CA