If you’re thinking of buying a home, you might have been keeping an eye on what’s happening at the U.S. Federal Reserve. The Fed recently cut interest rates for the third time in 2019, and that affects home buying in Texas. As of now, the fed funds rate stands at 1.5%-1.75%.
The interest rate changes are even more important if you currently rent your housing. Property values continue to rise, and so does what it costs to rent in places like Laredo, Weslaco, McAllen and Edinburg. When interest rates drop, that makes what you pay for a mortgage go down. Instead of throwing money away every month, you could be building equity in a home. If you make home buying your goal now, you lock in those low rates for the duration of your mortgage.
The Fed doesn’t actually set mortgage rates, banks do. The Federal Reserve exists to keep the U.S. economy stable and growing. The main way it does so is by raising and lowering interest rates to encourage or slow spending.
The fed funds rate is how much banks charge each other to lend federal reserve funds overnight. It influences the prime rate, the interest amount banks charge their best customers. It also affects other interest rates for bank loans, credit cards and home mortgages.
In other words, no matter how good or bad your credit is, a lower fed rate means banks charge less when you borrow. Different lenders charge different amounts, but interest rates go down when the Fed makes a rate cut.
If you buy a home now, it will cost you significantly less than it did a year ago. Let’s say, for example, you buy a home priced at $200,000. You put three percent down, which for that amount is $6,000. On a 30 year loan with pretty good credit, you might get an interest rate around 3.875%.
That makes your monthly payment an estimated $1,384 a month with property taxes, homeowner’s insurance, principle and interest. If you closed today, you would pay off your home in 2049. Over 30 years you would have spent $134,496.35 in interest.
If you raise that interest rate just a quarter of a percentage point, you pay much more. Your monthly payment jumps to $1,412. In 2049 you will have paid $144,556.57 in interest. That’s over $10,000 more over the lifetime of your loan.
Adjustable rate mortgages (ARMs) offer consumers one rate for the first five years they own their home, then that rate can change based on what the Fed does with interest rates during that time frame. If you’re home buying in Texas, be careful before you sign up for that type of loan. Interest rates right now are extremely low. There’s a chance in five years they could be much higher, which means your payment would skyrocket.
When interest rates are higher, people have to earn more money to make their monthly mortgage payment. They can’t afford to spend as much on a home. Sellers who can’t afford to wait on the market to improve end up having to sell their home for less. Property values don’t increase as quickly.
But when interest rates go down, buyers spend less on their mortgage interest, so they have more left over for their principal. They can shop in a higher price range, so home values go up.
If you’re thinking of home buying in Texas, recognize that now might be the very best time to do so. Interest rates just reached their new low, so property values haven’t yet been affected. By next year it could cost you more to buy the same type of home.
Lower interest rates cause home prices to go up, and the price of everything else does too. Inflation is the rate at which prices for goods and services rise. When people pay less to borrow money, they spend more. The economy grows and companies start to charge more for what they do and sell.
When you put money in a savings account, money market or certificate of deposit, the bank pays you interest. When interest rates are high, financial institutions pay customers more money for keeping their money in an interest-yielding account. When rates are low, banks pay less.
That means it’s harder to grow your money by putting it in savings and allowing it to gather interest. It’s great to have money in the bank, but right now because interest rates are low, that’s not going to generate much long term wealth. A Bankrate survey reveals 7 out of 10 Americans is making less than 2% on their savings.
So if you have cash, it makes sense to invest some of it in an asset that will grow in value. Property values in Laredo and the Rio Grande Valley area are climbing, and experts predict they’ll continue to do so.
Just like low interest rates don’t motivate consumers to start a savings account, they also make banks less motivated to lend. Financial institutions give mortgage loans because collecting interest is how they make money. When they don’t stand to make as much, they get picky about who they loan to.
To have the best chance at home buying in Texas, show lenders you’re a good risk by getting and keeping your credit in good shape. Credit is extremely important when you apply for a mortgage, but if yours isn’t so great, we can help. Schedule a free confidential credit consultation to find out how we get buyers in a brand new home, sometimes in less than 90 days.
If you have a balance on your variable rate credit cards, that rate is linked to the prime rate. The Fed rate cut means you should have seen your credit card interest rate go down as well. Your balance won’t go down, but the amount at which it accrues interest will. Take advantage of that to pay off your balance before rates start to go back up.
The same goes for variable rate student loans. Lenders set rates wherever they choose, but overall interest rates on student loans move up or down with the Fed rate. If your student loan isn’t at a variable rate, you can still benefit from the interest rate cut if you have the ability to refinance.
With three rate cuts this year, buyers wonder if they can expect to see more. That might mean even more savings, more money that stays in their wallet over a 30-year term.
When the third rate cut occurred, Fed Chair Jerome H. Powell said the U.S. economy remains strong and indicated another cut wasn’t likely anytime soon. The Fed signaled it would wait patiently to see how consumer spending and business growth responded to the current rate, and that only signs of economic deterioration would lead to more cuts.
Waiting for more cuts probably isn’t a good idea. In fact, if you wait too long there’s also the possibility interest rates could start to go in the other direction.
WestWind Homes has move-in ready homes in Laredo and Rio Grande Valley. We also have relationships with some of the nation’s best lenders. We can even help if you need to get your credit in shape before you can get approved for a home loan. Tell us how we can help or schedule a model home tour when you get in touch today.