Bold Outlook • What A 1% Interest Rate Change Means For You
March 26, 2020
With the recent unprecedented rate cut by the Federal Reserve, banks have been inundated with people looking to take advantage of lower interest rates. Because of the overwhelming demand, we have not yet seen a huge reduction in mortgage rates. While we aren’t there yet, it is likely that we will see a dramatic shift in the upcoming months, which raises the question, “What does a 1 point difference in interest rate do for my bottom line?”
The answer to this question along with the volatility of the market could actually result in as much as a 25% difference in what a buyer can purchase! Here’s how…
MORE BUYING POWER
A 1% decrease in interest rate gives buyers about 15% more buying power.
When looking to purchase a $1,000,000 apartment, you would typically finance $800,000 (80% of the purchase price). At an interest rate of 3.5%, your monthly payment would be $3,592.
If rates dropped 1%, your monthly payment would go down to $3,161.
However, if you kept your monthly payment around $3,600, you could actually increase your financed amount to $920,000 (80% of the purchase price). At an interest rate of 2.5%, your monthly payment would be $3,635. After you add the 20% down payment, your purchase price becomes $1,150,000 which is 15% more.
Therefore, the 1% rate decrease allows you to spend an additional $150,000 (15% more!) for about the same monthly cost.
MORE FLEXIBILITY IN PRICE
The coronavirus pandemic has certainly halted the “spring market,” which is historically the busiest real estate sales market in New York City. When things get back to normal, we can’t predict what impact all of this will have on the real estate market, but the uncertainty of the economy along with the “pause” in business will likely make many sellers anxious.
Therefore, even if there is not a market wide drop, many sellers will likely be more willing to negotiate, especially if they have to move.
For example, a seller previously asking $1.25M may be more likely to accept an offer closer to $1.15M than they would have a month ago.
Given our example of spending about $3,600 a month on your mortgage payment, where you had previously been looking at $1M apartments, if interest rates drop over the next few months as we return to normal, your buying power increases to $1.15M, and your increased negotiability makes it more likely to get an accepted offer on an apartment previously asking $1.25M.
Therefore, these combined factors result in a buyer potentially being able to purchase 25% more than they would have just a few weeks or months ago.
Once again, we are not here to predict the future, nor are we implying a market drop. It is our job to interpret the data, and we consider it our responsibility to keep our clients informed.
We will continue to monitor the pulse of the market, but all signs point to it shaping up to be a very good time to buy!
Wishing you and your family good health!