Explore the Benefits of Low Interest Rates

The benefits of low interest rates create positive conditions for homeowners and potential homebuyers alike. Knowing how home interest rates work is helpful in understanding just why that is, and why now is a great time to consider making your real estate investment.

Since the 2008 housing crisis, interest rates have steadily been on the rise. However, the Federal Reserve announced after their July 2019 meeting that they would be reducing rates for the first time in over a decade. Target rates were cut by 25 basis points, or .25%, from 2.5%-2.25% to 2.25%-2%. This reduction in interest rates may help influence the long-term cost of your home purchase for the better.

Explore the home loan and interest rate basics affected by this change to see if now is the right time for you to buy.

How Does Home Loan Interest Work?

Understanding interest rates on your home loan can help you accurately budget for your purchase and secure a better deal on your home. There are a few factors to consider when calculating your loan interest: interest rate and loan term.

There are two main types of interest rates, fixed rates and variable rates. Fixed-rate loans are agreements that set the interest rate for the duration of the loan. Market fluctuations and other extenuating circumstances will not affect your monthly payment. Variable-rate loans, also called hybrid loans or adjustable-rate loans, will be affected by certain conditions, meaning the interest rate on your loan can rise and fall over time.

A loan term refers to the duration of your loan agreement or the time it will take to pay off your loan in full. 15-, 30- and 40-year mortgage terms are the most common, though each financial institution may offer additional options.

Interest is essentially your payment to a lender for renting their money—the longer your term or, the higher your rate, the more you will be paying to borrow.

Benefits of Low Interest Rates

Homeowners already locked into a fixed-rate loan will not be affected by the Fed’s decision to lower interest rates. However, those holding variable rate loans and potential homebuyers looking to obtain a loan will feel the positive effects of this change.

For example, if you obtained a $250,000 30-year variable rate loan at 2.5%, your monthly payment would be roughly $987. The cumulative interest amount paid by the end of the loan would equal just over $105,600, making the total cost of your loan about $355,600.

Lower interest rates, even by just .25%, can make a significant difference. Consider the same loan amount and term with a 2.25% interest rate. Your monthly payment would drop to $955. This decrease adds up over time to a cumulative interest payment amount of around $94,000, and a total cost of roughly $344,000—this seemingly small change can save you more than $10,000 on your home purchase.

These figures are, of course, assuming the rate stays the same over your loan term. Variations during the term can still result in savings, though their significance will vary based on how far into the term you are. Say you began the loan mentioned above at a 2.5% interest rate. Fifteen years into the loan, the rate dropped to 2.25% and stayed there until you paid the loan back in full. Your total loan payment would be $99,800—an approximately $6,000 savings from your original rate projection.

While homeowners with variable rate loans will see benefits from this rate reduction, potential homebuyers looking to secure a fixed-rate loan stand to gain arguably more. With interest rates about 2% lower than the historical average, now is a great time to invest in your next home. Obtaining a fixed-rate loan now with the new lower interest rates can help ensure you pay less for the duration of your loan.

Some homeowners waiting to see the lowest interest rates possible before pulling the trigger on their home purchase may risk missing the window of opportunity. Taking advantage of today’s low rates and locking in a fixed-rate loan can help protect your investment should rates begin to rise again in the future.

Are you looking to take advantage of the many benefits of low interest rates homebuyers can enjoy today? Explore move-in ready Perry Homes properties to find your family’s next dream home!