Category Archives: Lender Update


Purchasing Power
Purchasing Power

Over the last week or so, mortgage interest rates decline by approximately ½%.  The net effect will allow a prospective buyer to qualify for a larger loan amount and keep the payment the same or lower the monthly payment.

For example, if a home was purchased for $325,000 at a 4.25% interest rate and a 20% down payment on a conventional loan; the loan amount would be $260,000 and the monthly principal and interest payments (PI) would be $1279.  An interest rate of 3.75% would allow a home buyer to purchase a home for $345,000 ($20K  more), for the same monthly PI payment.

Or if a home buyer purchased the same home at $325,000 and 3.75% interest, the monthly PI would be $1204 which is $75 less per month and a $900 savings per year.

For any potential home buyer who believes that prices will soften, it’s important to also consider the effects of changes in interest rates. As shown above, if rates go back up to 4.25%, but home prices dropped by say $10,000, a buyer is worse off than had he/she purchased at the higher price and lower interest rate.  Under this example, prices would need to drop by $20,000 before there was a break even between the higher price and lower rate.

There is a “mass psyche” that I see with buyers and sellers in general.  Last year buyers were buying anything they could get their hands on and were willing to pay above asking price and appraised value.  At the same time, sellers were holding off listing with the belief that prices would continue to rise in the short run.

The current market has more inventory and some sellers may now regret not putting their homes on the market in Spring 2013.   I see the “mass psyche” of many buyers is to sit and wait.  They wait because there is a lot to choose from and so are waiting for the perfect home to come along. There has not been recent press about the possibility of interest rates increasing so some buyers do not feel a sense of urgency since they believe rates will stay low. Some potential home buyers believe prices are going to go down. Many buyers try to “time” the market and purchase when they believe prices are lowest.  We are also entering, what is typically, a slow selling season with holidays coming up which may be a benefit to buyers over the next few weeks/months.  However, what was typical in the past doesn’t seem to apply in today’s environment.

Unfortunately, there is no way to know where prices or interests rates are going or how quickly it will all change, but it’s important that prospective buyers have this information for consideration.  This may be a pivotal point and opportunity in the market for home buyers.  And most opportunities usually only become evident after they are gone.


rising interest ratesAfter Fed Chairman Ben Bernanke’s address last week, stocks dropped and interest rates increased.

As recent as a month ago, it was still possible for a home buyer to purchase a home with an interest rate of between 3% and 3.5%. Today, rates are generally floating around 4.5% or higher. In the big picture of housing interest rates, 4.5% is still an excellent rate, but we’ve all been spoiled in recent years and this change does impact the housing market. Let’s take a look at how this rise in interest rates is affecting the purchasing power of potential homebuyers in the marketplace by way of an example.

Let’s say that a buyer is qualified to purchase a home priced up to $400,000, assume that the buyer is putting 10% down and then look at payments under two interest rate scenarios as follows:

Purchase Price: $400,000
10% Downpayment: $ 40,000
90% Loan Amount: $360,000

Monthly Principle & Interest Payments
At an interest rate of 3.5% : $1617
At an interest rate of 4.5%: $1824
Increase in Monthly Payment: $ 207

Assuming that $360,000 was the maximum loan amount that our buyer could qualify for at 3.5% with a payment of $1617, what is the new price that our homebuyer can now afford? The new maximum loan amount based on a payment of $1617 and an interest rate of 4.5% is $319,133. With 10% down, the buyer’s maximum price is now $354,592 or $45,408 less in price.

Is it reasonable to think this will affect demand on the housing market? IT SURE IS! Our homebuyer’s purchasing power just went down by more than 11% with a 1% increase in interest rate. Whatever risk concerns have been in the past about price declines in the market, a 1% increase in rate overshadows to a great deal any decline in market price.

Will prices continue to increase at the rate we seen over the last several months. I’m seeing a change in the market now with prices leveling off through the summer. While it’s reasonable to assume we will see prices continue to rise, I don’t believe we will see the rate of appreciation continue at the fevered pace of the last year. Will interest rates be higher than 4.5% by June of 2014. Who knows? I have talked to several lenders and they are at odds with each other on this point.  Any potential buyer or seller should at least be prepared for the potential of higher rates over the next year.

If you are looking to buy a home in today’s market and have been pre-approved on a home loan through a lender, it’s a good idea to huddle back up with that lender to determine if you need to adjust your considerations on price, square footage and potential location.

If you are a homeowner thinking of placing your home on the market, it is important to understand the impact of rising interest rates, buyer’s purchasing power and negative impacts on demand.  Bottom line: Price your home appropriately and rely on the advice of a Real Estate Agent you trust who will provide you the facts about pricing and marketing your home.

Steve Quaranta
Better Homes and Gardens Real Estateimage003
Phone: 916-276-7653