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Rates are Overrated

Buckle up and get ready to have your mind blown!  Okay, it’s not THAT mind blowing – some of you might even say, “well, duh” – but it’s still interesting.

The economists (that’s a fancy term for “the smart folks”) at the New York Federal Reserve published the results of a study, which reveal that changes in down payment requirements have MORE influence over home buyers’ willingness to buy than changes in rates.  Follow me on this – you’ll be glad you did!

Surveying both buyers and renters, those smarty pants at the Fed found that the effect of interest rates may be overrated when compared to changes in down payment requirements.  The study found:

•Dropping the down payment from 20% to 5% INCREASES the willingness to purchase, on average, by 15% among buyers and 40% among renters
•Decreasing the interest rate on a 30-year fixed-rate loan only raised the willingness to purchase by 5%, on average

If you’re straddling the fence between BUY RIGHT NOW with a higher interest rate and WAIT AN UNKNOWN PERIOD OF TIME to save 20% of the purchase price, here’s an example to give you a healthy push.  Take a look at the numbers for a house with the purchase price of $200,000 with a 30-year fixed mortgage:

WAIT  VS.   BUY NOW
$40,000 down payment vs. $10,000 down payment
Total Loan Amount: $160,000 vs. Total Loan Amount: $190,000
Interest Rate: 4% vs. Interest Rate: 4.375%
Monthly Mortgage (P&I): $763.86 vs. Monthly Mortgage (P&I): $948.64

No doubt $763.86 is better than $948.64 for a monthly payment – that’s not what’s at stake here.  The difference between those two payments is $184.78.  In order for a person to save the additional $30,000 to go from a 5% down payment to a 20% down payment at the rate of $184.78/month, it would take over 162 months – 13.5 years! – to get to that point, which is almost half the life of a 30-year mortgage. 


For many perspective buyers, that additional $185 is significant – and this is where you separate a good loan officer from a great one.  We, the great ones, have a number of strategies to help make up that difference to help folks get into a home as soon as possible!  How does that rate?

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