Whether you’re a first-time homebuyer looking for your first primary residence or you’re a seasoned real estate investor with a thriving portfolio of rental properties already, one of the first things you do when looking for a house is punch some numbers into a mortgage calculator to estimate your monthly expenses and determine how much you can afford to spend. In these calculators are many variables, including the purchase price of your house, details about property taxes, and more.
Perhaps the most influential variable to alter is your mortgage interest rate; it doesn’t take long to figure out that the lower the mortgage rate is, the more attractive the mortgage becomes, and perhaps for obvious reasons. But are low interest rates ever a bad thing in real estate?
Low mortgage rates are generally good for anyone interested in buying real estate. When buying a property, most people borrow most of the funds necessary for purchasing a property. For example, you might put a 20 percent down payment down and borrow the remaining 80 percent of the purchase price. You’ll borrow this money from a financial institution, usually a bank, and that institution is going to charge you interest on the mortgage loan.
Over the course of the loan, you’ll pay a combination of principal and interest, gradually paying off the loan while compensating the bank for taking the risk of loaning you the money in the first place. Mortgage rates are usually represented as annual mortgage rates, so if you have a mortgage with 4 percent interest and you borrow $200,000, you can expect to pay $8,000 a year in interest (to start).
Where do banks get these mortgage rates from? First, understand that banks typically offer different interest rates to people with different credit scores; the better your financial standing, the better your interest rate will be. But besides that, the single most influential factor in determining mortgage rates is the target federal funds rate, which determines the interest rate associated with loans from the Federal Reserve to member banks in the United States.
Without getting into the details of how the Federal Reserve operates, it basically works like this. The Federal Reserve provides capital to member banks with interest, then those banks lend the money to consumers at a slightly higher interest rate to compensate for risk and turn a profit. Given this interaction, it’s easy to see how lower Federal Reserve interest rates lead to lower rates for consumers, and how higher interest rates lead to higher rates for consumers.
There are many reasons why low interest rates are appealing to real estate investors.
Given those advantages, is it possible for low interest rates to ever be a bad thing?
Let’s take a look at some of the detrimental effects that low interest rates can have:
While these disadvantages are important to consider, the advantages do seem to outweigh them.
As of the time of this article’s writing, the Federal Reserve plans to drop interest rates this year. This comes after an extended period of raising rates, which in turn followed an extended period of interest rates near zero. Expect to see lower mortgage interest rate soon.
The bottom line here is that there are some real disadvantages to low interest rates, including higher competition, higher prices, and inflation. However, there are so many advantages associated with low mortgage rates that it’s hard to say they’re ever a “bad” thing for homebuyers and investors.
As always, it’s important to work with experts as you make these complicated economic decisions. If you’re looking for a real estate agent who can help, you’re in the right place. Contact us today if you’re ready to begin or accelerate your search!
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