The Media is Always Talking About Real Estate Markets Going Up and Down. Why? (Part 2)
Rather than making the last post go on for many pages I thought it best to do it in two pieces. The following is an exploration of a point which I think deserves more press than it gets regardless of the real estate market situation. Here, I’d like to talk about what is going on with interest rates and how they affect your actual costs. Interest rates are mentioned fairly regularly in the media but I find that like with so many other things the context is not adequately explored to give people a sense of their importance and they are largely pushed aside by the usual “Are real estate prices going up or down today?” silliness.
I won’t go into great detail with this but instead paint a broader picture. It bears mentioning that I am a Realtor and not a Mortgage Broker. So for detailed and up to date info on that I recommend asking a Mortgage Broker. I will be asking at least one to have a look at this post before I put it up just to make sure all the details line up.
Ok, on to mortgage interest rates, an aspect of real estate that a lot of people have a hard time wrapping their heads around. It’s ok, don’t feel bad if this is you. It is however really worth learning about as it can and will affect your long term financial well being.
Mortgages and other related ways of financing your home are tailored specifically to the Buyer, their new home and of course financial and real estate markets.
Interest rates affect everyone who makes use of a mortgage and it makes a very big difference in terms of what you’re paying for your real estate long term. Actually, it makes a bigger difference short term than I think most people realize. As they’re at historic lows lately and are expected to hold for a little while before rising again, I would highly recommend paying attention to this matter if you have a mortgage or are thinking of getting one. Even if you aren’t but have some savings, maybe you should still look into it. Just a chat with a Mortgage Broker can change your life.
To put things in perspective, let me show you how the monthly payment on a $300,000 mortgage differs based on a change of interest rates. You can verify my numbers by making use of my online mortgage calculator if you like. Even better, talk to a mortgage broker. I am using 10% down and including the CMHC insurance payment on a 25 year amortization. (I am not saying that these are the criteria available in the particular offers of that rate. This is for reference.) The first number is a currently advertised rate through a local mortgage broker with a five year term, the rest are incrementally increased from there.
FYI, the historical average since they started tracking these numbers in the 70’s is around 9%. That number is skewed a bit by what happened in the early 80’s but it still gives you an idea.2.89% – $1290 3.0% – $1306 3.15% -$1328 3.5% -$1379 4% -$1454 4.5% -$1531 5% -$1610 5.5% -$1691 6% -$1774 6.5% -$1860 7% -$1946 That’s just per month. Let’s look multiply these by 12 and look at what the difference is over a period of one year: 2.89% – $15,480
3.0% – $15,672
And that is just the beginning. Over a period of five years it adds up even more. For the sake of simplicity I’m not getting into variable rates and how they work and what they will do. Talk to your mortgage broker about that. The point I’m trying to make is that interest rates on mortgages and how hard/easy it is to qualify for them is at least as important as whether market prices seem to be going up this week or down, yet it is so rarely talked about in the press and if it is it’s usually presented in an unclear fashion. Why? Well, I think it’s because it’s so easy to tug people’s emotions with ye olde “up is good, down is bad” rhetoric.
The point should also be made that what you can actually qualify for (get) will change considerably depending on what interest rates are even if the amount you are paying per month doesn’t change. For example, based on a payment of $1500 per month, a rate of 2.89% and a 30 year amortization today you can have a mortgage of roughly $362,000. If rates move by 1.5% and become 4.39%, and you get the same 30 year amortization at the same payment of $1500, you can only get a $301,000 mortgage.
Interest rates are life changers, don’t you think?
Back to the broader point on this two part series and much of what I write about on this blog, yes the ups and downs of the real estate markets have meaning. Do not however allow yourself to think that they are the most important thing to be aware of regarding real estate. There are details, like your own financial standing, which trump that and there are many other things to be aware of that will make it easier to keep your financial standing intact.