So how much of a difference will a significant interest rate drop make for Orange County, CA home buyers? For some people it will be a mean lower payment. For others, the increased buying power will afford them a better home, extra bedroom, bigger yard, or whatever it is that will meet a home buyers needs.
It is estimated that a .5% drop in interest rates will result in approximately a $15,000 to $25,000 higher purchase price without increasing the monthly payment, depending on the actual purchase price the buyer is targeting.
Below are 3 scenarios, each based on an FHA loan, which only currently only requires a 3% down payment. Effective January 1, 2009, FHA will require a 3.5% down payment. FHA has become the loan of choice for Orange County, CA home buyers who have less than 10% for down payment.
Let's assume John and Lisa make a combined $6,000 a month in gross income. They will be able to get a loan from their 401K for the down payment and plan to have the seller pay closing costs. They would qualify for a purchase price of approximately $325,000. (See image to right.) At a rate of 5.5% (5.682% APR) the total payment, including taxes and insurance, would be $2,357. With a rate drop of .5% to a new rate of 5% (5.196% APR) they would be able to buy a $340,000 home and still have the same payment.
If they chose to stay with a $325,000 price, then their payment would be approximately $100 less, or $1,200 per year.
Let's assume Mike and Sally make a combined $8,500 per month. Their down payment will come from a combination of savings and gift from family. At the same 5.5% rate, they would have a payment of $3,263 if they bought a home for $450,000 with 3% down. But with a rate of 5% their purchase price would be $470,000 while still maintaining the same payment. I nice $20,000 increase in purchase power. The payment savings would be $137 per month if they decided to stay at the same price.
Now let's assume Carl and Susie are looking to purchase a home in Irvine, CA in the $600,000 range. Their combined income is $12,000 per month, and at a rate of 5.5% their total payment would be $4,351. A rate drop to 5% would allow them to increase their purchase price to $625,000 without increasing their monthly payment. A $25,000 increase in purchase power. If they decided to stay with the same price, their monthly payment would be $183 lower.
Interest rates have already come down significantly over the past few months and now is a great time to buy a home. Low mortgage rates are already increasing the number of home buyers making offers for the first time. This is the first time in many years in Orange County, CA that a renter can look at a Rent vs Own analysis (with a 30 year fixed rate and 3% down), and without making outrageous assumptions, see the huge advantage of owning a home.
Authored by Tim Storm, CMPS, Sr. Loan Officer with Home Point Financial, a Direct Endorsed FHA Lender located in Orange County, CA. Direct line 949-829-1846.