WHAT'S SO SPECIAL ABOUT INTEREST RATES?
If you were of the age to buy a home in the year 1981, like my mom and dad were in Muskegon, Michigan, you would have locked in an interest rate between 16 and 18%.I *LOVED* our house at that time. Here’s a recent photo of it.
It is mostly unchanged, except when we lived there it was red with that beautiful white trim. (And we didn’t have a star over the porch).Built in 1885, there were all sorts of secret rooms that my brother and I hid out in, and a universe to be explored in the woods behind it.
My parents paid $60,000 for it.
Assuming they put 10% down, if their rate was the 1981 average of 16.81%, their monthly principal and interest (P&I) payment would have been a stiff $761.55.
If you were to borrow the same amount today, with a rate of 2.75%, your monthly P&I would be $220.46.Thankfully, since 1981, rates have been on a relatively steady decline. Here’s a graph of that trend:
Yes, the rates have dropped about 85% from where they peaked those decades ago.
HOW DOES THE LOW RATE AFFECT THE MARKET?
We don’t need to travel back to the 1980’s to see the effect. Even from a couple years ago, these new lows allow more buyers to enter the market because more of us can now qualify for a loan.
And with more buyers competing for houses, there is an upward effect on prices. We have certainly seen that here in Bellingham. But let me illustrate it a bit more clearly...
Heather and I bought this house in Sudden Valley in 2008 with a 6.75% interest rate:
We LOVED this house and its stealthy trail connecting it to Stimpson Nature Reserve.
Our monthly P&I payment was about $1875.Let’s look at a graph that shows that exact payment plugged into a range of interest rates.
Same payment, different rate, WILDLY different loan amount.
For the same exact monthly P&I payment that we had back in 2008, with today’s rates you can borrow 58.9% more loan dollars.
And since the loan amount you qualify for is largely a function of your debt-to-income ratio, when rates drop, you -- and every other qualified buyer -- can borrow more, offer more, and pay more for a house.
One result: Home prices go up.
HOW LOW RATES AFFECT RENTAL PROPERTY OWNERS
If you’re a student of rental property investing, you know that rentals have the potential to make the investor money in 4 (primary) different ways.
The two most talked-about are appreciation and cash flow.
Bellingham’s super power is appreciation, but it has not historically been a strong market for those who love cash flow.
With a minimum required down payment of at 20% for a rental property loan, at a 5% interest rate a $500,000 purchase has a P&I payment of $2147.29. Tack on taxes, insurance, and operating expenses and you may be operating in the red — or barely breaking even.But drop that interest rate to (actually available) 3% and re-run the numbers. Your new monthly P&I is now $1686.42. You just went from “break even” to positive monthly cash flow of $460.87. BAM!!!If you’ve been thinking of getting into rental property investing, the current cash flow prospects are quite delicious. Heather and I have owned rentals for 12 years, we have 11 units total, and I will gladly go deep, deep into the weeds with you about investing.
WHAT IF I ALREADY OWN & HAVE A MORTGAGE?
Then you should strongly consider a refinance.First off, the entire concept of refinancing is about one of three things:
Saving money (aka: a rate and term refi)
Accessing money (aka: a cash-out refi)
A combination of both.
You might refi to use some of the equity in your house to:
Pay off other, higher-interest debt;
Do a value-enhancing project to the property;
Buy a rental property with lower-interest-rate money than if you got a non-owner-occupied loan on the investment.
And other reasons.
But hold on. When does it NOT make sense to refi?
GREAT question! And there are several answers, all of them based on one simple fact: It DOES cost money to refinance. Closing costs: Origination fees, appraisal, recording, etc. It costs in the several thousands usually.So, with that factored in, ask yourself:
Is the new rate less than half a point (0.5%) below my current rate?
Am I only planning to keep this house for 3 years or less before selling?
What you’re getting at is: How far out is my break-even point?
If the date that your savings cover the costs is further out than your planned sale date, then stay put with your current loan.
But if the payback date is within 3 years and you're planning to keep the house (even if you plan to move out, but you're going to keep it as a rental) you should definitely take these next steps:
If you don't have it already, get your current interest rate and pay-off amount(s) from your current lender(s).
Call or email any of our favorite lenders listed right here:
Carmen Denson, Umpqua Bank(360) 319-5278 or CarmenDenson@umpquabank.com
Heidi Kenerson, Peoples Bank(360) 201-2958 or heidi.Kenerson@peoplesbank-wa.com
Ashley Walker, Bank of the Pacific(360) 756-9060 or Awalker@bankofthepacific.com
