One of the most talked about, yet least understood, elements of purchasing and owning a property is mortgage loan interest rates. If you’re able to purchase a property with cash, you don’t need to worry much about interest rates—although they still affect the housing market. How? Mortgage interest rates reflect the cost of borrowing money. When interest rates are low, the cost to borrow is low, which incentivizes buyers to enter the market. More buyers = more demand = increasing home prices.
The opposite is also true: higher interest rates = higher borrowing costs = fewer buyers = reduced demand = decreasing home prices. Of course, many factors influence housing prices in a given market, but this general theory holds true over time with significant interest rate changes. In Portland, where the real estate market has been very strong in recent years, a relatively small increase in interest rates likely won’t drive prices down much.
In general, we’ve seen highly competitive interest rates over the past few years, ranging from the low 3s to mid 4s. Compare that to the average rate in 1981 of 16.64%. In fact, the 30-year fixed rate didn’t drop below 10% between 1980 and 1990, and it still hasn’t risen above the levels seen in 2007–08.
So how does the interest rate affect your payment? Mortgages are amortized over the life of the loan, typically 15 or 30 years. The lender calculates the total amount of interest that would accrue monthly over that time and creates an amortization schedule. This schedule results in a single monthly payment that doesn’t change, regardless of how much principal remains. Mortgage companies front-load interest in the early years of payments, meaning your equity builds slowly at first. Since interest is calculated monthly, there are essentially 360 instances of interest compounding during a 30-year loan.
Still a bit confusing? The key takeaway is that most loans allow borrowers to pay more than their required monthly payment and apply the extra amount toward the principal balance. While this won’t reduce your monthly payment, it will shorten the life of the loan and reduce the overall interest paid.
If you’re planning a purchase and need a mortgage contact, we have a few great recommendations. Give us a call or send us an email!
