Manage your debt

Less Debt + Low Interest Rates = More Buying Power: A Winning Equation

Gene Mundt, a mortgage industry veteran gives us insight into the current mortgage climate with its low interest rates.

In marketplaces where high demand for home buying is coupled with a short supply of homes for sale … additional factors are pushing prices higher …  

Manage your debt

The short supply of homes now available for sale in many of the areas across the U.S. weighs heavily in the equation.  The National Association of Realtors recently reported that, in September, the total housing inventory in the U.S. hit a new record low.

There was just a 2.7 month supply of homes available for purchase during the month of September.  That rate sunk even lower in October, falling to a 2.5 month supply.

But during that same time period and previous months, many hopeful homebuyers have been: 

  • Eliminating debt
  • Lowering their monthly debt
  • Saving more money for a down payment & closing costs

These NAR statistics, plus other economic factors (shared below) are creating new opportunities for buyers and sellers alike.  As a loan officer, I’m finding that many of my clients and new home buyers are now seizing the unique set of circumstances and opportunities before them.

Current homeowners are calling to assess their ability to sell and then buy again.  If not wishing to sell, they’re considering a refinance of their current home as a way to save money or buy an investment property for additional income.

Many of these applicants have established a simple goal for themselves during this unique time period.  They’ve established and followed a budget that allowed them to save more money.  They had a goal in mind … to begin a home search or investment property search sooner than later.

Their goal, paired with what is perhaps the only positive of the current pandemic … forced savings … has helped them to reduce their debt, improve their credit scores, accumulate a downpayment, save for closing costs, and start their home buying search more quickly than previously expected.  It truly speaks to the old adage, “turning lemons into lemonade”.

Add to the above advantageous equation, the low low interest rates available to consumers at this time.  Teamed together, they are helping current home buyers by expanding their home buying power.  Borrowers are now able to qualify for higher loan amounts and homes with higher purchase prices.

Less debt typically translates into higher credit scores for consumers too.  That is especially important for those buying a home. Higher credit scores = Lower interest rates = lower monthly mortgage payments.

Just look at how a lower interest rate (associated with better credit scores) reaps real savings:

LOAN                         TERM                      RATE

$225,000                     30 Years                     3.00%

 Equals = $948.61 Principal & Interest Payment monthly

$225,000                     30 Years                     4.50%

 Equals = $1,140.04 Principal & Interest Payment monthly

  • $192.00 Difference in monthly payment
  • $68,916 Difference in interest over the life of the loan
  • $38,000 more in Buying Power
  • 1.5% Difference in Interest Rate

* Interest Rates are for illustration purposes only

* Note:  A 4.50% interest rate was fairly typical 2 years ago. For those that purchased at that time and have that interest rate on their mortgage, it would be wise financially to talk to a lender to see if a refinance is possible.

So even though a large portion of the year 2020 has been difficult for all in many ways, there have been some positives for consumers within mortgage financing and housing markets.  Although unintended, these consequences have proven good for those in a position to take advantage of them.

Everything mentioned above can lead to more sellers being successful when listing and selling their homes.  It allows them to relocate, downsize, and/or buy the step-up home they’ve been dreaming of.

The benefactors of that scenario could be:

  • Home Builders
  • People looking to turn equity into a second home purchase
  • Investment Property buyers looking for rental income

Remember I mentioned additional economic factors above? 

Fannie Mae and Freddie Mac (Government Sponsored Enterprise/GSEs) have also just announced that they are increasing Loan Limits for the upcoming 2021 year.

In most of the U.S., the new maximum loan limit will be:

$548,250, an increase from $510,400 or $37,850 higher than 2020. (Conforming loan limit (CLL) for one-unit properties)

Please note:  
  1. New limits also apply for 2-4 Unit properties (and up).  Contact a Lender for further info
  2. For those portions of the country where housing prices are much higher, different conforming loan limits apply.  Click HERE for a map of conforming loan limits across the U.S.
While this higher loan limit does not affect all buyers, it may provide relief to those home buyers previously considering a Jumbo Loan.  With the new higher loan limits announced, those considering a higher-priced home purchase can broaden their choice of potential mortgage lenders.  They also may find the qualification for their loan accomplished more easily.  The use of a Jumbo Loan may be circumvented entirely.
The GSEs announcement reinforces the overall message that … for those dreaming and capable of buying or refinancing a home or property purchase at the present time … opportunity for savings exists within mortgage financing and home buying.  The equation of higher loan limits, less debt, and low interest rates currently translates to more home buying power for consumers.
No one can predict for certain how long these positives and opportunities to buy or refinance may last.  So now might be the time for you to take action.
Don’t hesitate to reach out to a lender to ask questions and get the facts and information you need to make a sound decision.
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