Jim Valentine: Interest rate payment comparisons

We’ve talked a lot recently about interest rates, how they’ve remained low, or lower, and how they are helping to drive the current dynamic market.

For someone sitting on the fence about buying a home, or renting and not giving it serious thought, we thought it might help if we illustrated the point in dollars. That is, after all, what it really is all about when it comes to interest rates and their benefit to a buyer.

Payments are figured by using what are called the Ellwood Tables. A man named L.W. Ellwood spent countless hours figuring out what payments would be based on principal amount, interest rate, payment rate and term. The results of his work are more commonly known as Amortization Tables, or what your payment would be for every variable of each of those four components. In the good ole days most agents carried what was called the “Blue Book.” It was a small but thick book that had many pages of amortization tables so we could look up any payment. It also contained clauses that an agent could use to complete a contract.

Today we have computers, phones and calculators that have the tables built in. Payment amounts are achieved in seconds and variable amounts easily changed to yield speedy results for comparison purposes. This can help buyers trying to decide how much to put down, how much they can afford to borrow, or how long to make the loan term before they structure their offer. It is quick, simple and accurate.

One way to gain perspective on the 3%, or lower, interest rates available to many today is to look back a few years to when 6.5% was a very good rate. When rates dropped to 5% the industry was ecstatic. There was a time, however, when real estate agents were saying, “If it ever gets back to 12% we could make a living!” Rates at that time were 18% and 9 points (a point being 1% of the loan amount paid at the close of escrow). These days are better than those days.

If you got a loan at 3% today and you wanted to borrow $300,000, your monthly payment would be $1,265 on a 30 year amortized, principal and interest only. That same loan at 4% would have you paying $1,432 monthly, and at 5% it would be $1,610. Substantial differences in payments for such a small change, but that is why we keep touting today’s low interest.

If you are locked at a principal and interest payment of $1,265 monthly due to income qualification, your buying power drops significantly as the rates increase. For instance, that $1,265 payment with a 4% annual rate would limit you to borrowing $264,968. At a rate of 5% your maximum loan would be $235,656. Very substantial changes as you can see. That is where adjustable rate mortgages with low start rates begin to appeal, however, it is important to understand the risk of such loans as well as their home-buying-enabling benefits.

You can now understand how important it is to capitalize on premium rates while they are available. The benefits of buying loans down by paying points may also become more apparent. More apparent now, too, may be why prices go up and down with the interest rates. If the buyers’ buying power is reduced they can’t pay as much for the house. They will have to buy a less expensive property, or the seller will have to adjust his price downward so as to be affordable to those buyers that fit his property’s buyer demographics.

Interest rates have been steady for some time now due to the national economy gaining strength in recent years as well as the lack of desire by the feds to change rates with the COVID-19 pandemic in full swing. There appears to be a window of time in which you can capitalize on the low rate bonanza.

Call a lender and see what you can get done — you might be very surprised and pleased. These are the good ole days!

When it comes to choosing professionals to assist you with your real estate needs… Experience is Priceless!  Jim Valentine, RE/MAX Realty Affiliates, 775-781-3704. dpwtigers@hotmail.com