Why Interest Rates Matter (Now More Than Ever!)

This is a re-post but I think it carries more weight today than it did when I first wrote it.  Enjoy

Let’s say that you could afford a 1K/month payment on a house (forget taxes & insurance to keep things simple).  How much house could you afford at a certain interest rate?

• 3% – 250K
• 4% – 220K
• 5% – 196K
• 6% – 176K
• 7% – 158K

As you can see, the lower the interest rate the bigger the loan you can afford.  Which leads us to another question… WHY IS THIS IMPORTANT?

Well, let’s look at payoff percentages on each of the loans above after 5 years.

• 3% – 11.1%
• 4% – 9.6%
• 5% – 8.2%
• 6% – 6.9%
• 7% – 5.9%

So not only do we get a bigger loan at a lower interest rate, we pay off the balance at a faster rate too.  For example, we could get 220K loan at 4% and pay off 9.6% of the loan after 5 years = $21,120 in equity!  Or we could get a 176K loan at 6% and pay off 6.9% of the loan after 5 years = $12,144 in equity!  Remember, both of these loans have the same 1K monthly payment.  The difference is clear, lower interest rates make a difference.

Thinking of buying in the next 12 months?  Give me a call/e-mail and we can discuss where interest rates are headed.