Mortgage Rates and Home Buying Power

If you are even a casual observer of mortgage interest rates, it’s akin to watching an amusement park carousel. One week they’re up, the next they’re down. But you still have your buying power.

While present rates are unlikely to drop to January 2021 levels that were well below 2.8 percent, the current level just above 3 percent is still historically low. Keep in mind that just 3 years ago, the average interest rate was 4.54 percent.

So what does this mean for people still on the fence about buying a home? Do low interest rates offset high home prices? Is there a chance interest rates could drop below 3 percent as we saw in September? Isn’t it better to wait until spring before buying a home?

If only we had a crystal ball!

These are all legitimate questions and concerns during a time when we are still seeing escalating home prices (but thankfully not at the levels witnessed in 2020), rising rent, inflation, and high demand for consumer goods and services.

Historic low mortgage rates have been partially responsible for exploding home prices across the country. That, combined with pent-up demand during the pandemic, surplus cash in consumers’ pockets, and institutional investors jumping into the residential real estate market, have made buying a home a challenging affair. Potential homebuyers who have chosen to wait out the storm aren’t seeing many signs of lower real estate prices coming anytime soon.

As we approach the end of the year, the upcoming holidays, and typically fewer people looking to buy, it’s a perfect time to digest what has happened over the last 10 months with interest rates and what we can expect to see with real estate prices in the Denver market. Evaluating this data may help in determining whether now is the right time for you to make your move into the Denver real estate market.

The Trajectory of Interest Rates is Heading Up

Since the end of September, aside from a few blips, interest rates have been slowly increasing and for the last several months have been consistently above 3 percent.

You may be wondering, what’s the big deal between 3 and 4 percent interest rates?

The good news is that with these low rates, people can actually afford more expensive homes. Generally, a one percent rate drop adds an additional $30,000 to your buying power, according to the National Association of Realtors.

Generally, a one percent rate drop adds an additional $30,000 to your buying power, according to the National Association of Realtors.

For example, say you’ve found a home listed for $400,000. You can offer a 20 percent down payment so your mortgage amount is $320,000. Without setting aside money for homeowners’ insurance, HOA fees, and property taxes, your monthly mortgage payment would be $1,528 with a 4 percent interest rate.

Now, say your interest rate is 3 percent for the same house. Your monthly payment would be $1,349.

That extra $179 per month adds up over time and over the life of the loan, you’ll be paying much less interest and will be building equity faster.

Furthermore, a 3 percent interest rate might allow you to look at homes in the $450,000 range (20 percent down = $360,000 loan @ 3 percent means a monthly mortgage payment of $1,518).

Home Values Continue to Increase

The valuation of Denver homes has been eye-popping, to say the least. Home prices from Oct. 2019 to Oct. 2020 increased a whopping 16 percent. The latest figures from Denver Metro Area Realtors show a year-over-year home price increase from Oct. 2020 to Oct. 2021 at 9½ percent. That means that while home value increases aren’t in the double digits, they are still way above normal.

What this means for you is that buying a home is a great investment. During “normal” times, a home may increase in value by 3 percent each year but lately, those projections are much higher. Even if you only stay in your home for five years, you’re likely to earn a respectable return on your investment.

What this means for you is that buying a home is a great investment. During “normal” times, a home may increase in value by 3 percent each year but lately, those projections are much higher. Even if you only stay in your home for five years, you’re likely to earn a respectable return on your investment.

Rising Rent in Denver

It’s no surprise Denver along with other major cities is experiencing an increase in rent. Due to skyrocketing costs from inflation, renters are shelling out more money each month and are having to sign at least one-year leases.

According to a recent article in the Denverite, since March 2020, Denver’s median one-bedroom rent has risen 11.8 percent, and two-bedrooms grew 14.3 percent. Figures from Zumper show that in 2021, rental rates have risen 20.7 percent — making Denver the 16th most expensive rental market in the U.S. Median rent for a one-bedroom apartment in the Mile High City is $1,690, and $2,190 for a two-bedroom.

Rising rent often plays a role in whether a person pursues buying a home. As a homeowner, your mortgage each month stays the same year to year (unless you have an adjustable-rate mortgage). And you have the opportunity to refinance should interest rates drop. It’s always a good idea to sit down with a lender or financial advisor to determine if you’re in a position to buy a home. There are many factors to consider: income, credit score, how much of a down payment you can afford, etc. This article helps explore some of the pros and cons on homeownership and whether it’s right for you.

Homeownership Remains a Key to Building Wealth

Beyond the low interest rates still available and the overall value of Denver property, there are other tangible and intangibles that make homeownership attractive to most people. Owning a home creates a ‘savings account’ of sorts as it’s likely your home will increase in value over time. Most homeowners will profit when it comes time to sell, and see a favorable return on investment.

Moreover, a home is a real, palpable object which you can enjoy and in which memories are made. It can provide years, if not decades, of enjoyment, comfort, and pride for you and your family.

Finally, owning a home allows you to establish new relationships among your neighbors that often turn into lifelong friendships. The social aspects of homeownership are often overlooked and under-reported, yet it is a critical reason people decide to buy.