Jim Valentine: What is a good interest rate?
Interest rates are an integral part of real estate. They can alter prices, values (not always the same thing), and dictate what home a Buyer is able or willing to buy. Interest rates come and go and leave an impression in their wake. Who can forget the interest rates of late 1980 and 1981? VA loans were 18 percent and 9 points. Each point is 1 percent of the loan amount.
In those times we always said if interest ever got back to 12 percent we could make a living. We got quite creative in those days with owner financing, assumptions, trades for value, i.e.- boat for a down payment with owner carry. Rates not only went back to 12 percent, but have gone all the way down to the 3.5 percent range and back up a bit. They are around 5 percent and, truth be known, fluctuate daily.
If rates were to go up it is likely that home prices will go down. There is a point where Buyers are frozen out of the sweet spot in the market if rates go too high. To keep the market flowing it is inevitable that prices need to adjust in such a situation. The converse is true when rates go down, Buyers can pay more for the same house as their payment is lower.
It is important to look at the overall picture when buying a home. Rates are important as they have a direct impact on your monthly payment, but other considerations offer a different perspective than just focusing on the payment. The price and potential future price is important. If you put 3.5 percent down on a home and it goes up 10 percent in one year you have a 300 percent cash on cash return. One way to look at it. Interest rate is incidental.
It also important to consider the pride of ownership factor and the peace of mind of owning your home. You don’t have to be concerned about a landlord raising the rent or selling the home. Worse, you fix it up nice and they move you out to put their mother in law in the place you cared for. When you own a home you can fix it up for your personal enjoyment and investment objective. It is one of the great joys of ownership.
Tax benefits are a key component to owning real estate. You can deduct the interest on your primary residence, take depreciation on investment real estate, deduct real property taxes that you pay on your properties, and more. Improvements that you make that qualify as capital improvements can be added to your basis so when you sell your potential tax liability is reduced accordingly.
So why talk about ownership benefits in an article on interest? Because it isn’t all about the interest rate. If a house offers you what you want in a home for you and your family, will suit your long term wants and needs, is affordable for your present means, and overall is clearly the right home for you, are you going to let the interest rate stop you from buying it if you qualify at the existing rate?
Our Advice: More important than worrying about the interest rate is the quality of the Loan Officer you are working with. Good Loan Officers are worth paying a bit more for, and can often save you money in the long run by anticipating bumps and mitigating them, being careful with costs, timing things for the best cash flow scenario, and more. To a professional Loan Officer you are a Person that needs professional care. There is a huge difference between online discount processing companies and your local Professional that will be there for you when you need him or her.
Loans are often given the least consideration in a transaction yet have the biggest consequence to your long term cash flow. Don’t stress over interest rates if yours is competitive, and don’t experiment with Lenders. Use the tried and true and focus on your wants and needs with your Agent. When it comes to choosing professionals to assist you with your real estate needs…
Experience is Priceless! Jim Valentine, RE/MAX Realty Affiliates, 775-781-3704. firstname.lastname@example.org.