
Why Dropping Mortgage Rates Make It Easier to Buy Your Dream Home
October 10, 2024 by Chevron Federal Credit Union
As mortgage rates continue to drop, many homeowners are rethinking their current housing situations. Now may be the perfect time to move for those looking to upgrade. Lower interest rates don't just benefit first-time buyers — they offer current homeowners an opportunity to potentially upgrade to a new home without a big boost in their monthly mortgage payments.
Here's what to consider:
Understanding the impact of lower mortgage rates
When mortgage rates drop, it directly affects how much home you can afford. The interest rate on a mortgage is a significant factor in determining monthly payments. A lower rate means more of your payment goes toward the principal, allowing you to afford a more expensive home with a similar or slightly higher monthly payment.
How much more home can you afford with a lower mortgage rate? Here's a simple breakdown:
Imagine you currently have a $300,000 mortgage at 6% interest. Your monthly payment (excluding taxes and insurance) would be around $1,800. Now, if rates drop to 4%, your monthly payment on a $350,000 mortgage would be around the same amount. Essentially, you could afford a higher-priced home without a major change to your payment.
Why now?
There are benefits to buying a home when mortgage rates are lower.
Maximize your equity
One of the most significant advantages is leveraging the equity you’ve built in your current home. Over the years, as home values have risen and you've paid down your mortgage, you’ve likely accumulated substantial equity. This equity can be put to good use when you sell your home, as it can provide you with a larger down payment for your next property.
Lock in a long-term advantage
Even a small drop in rates can substantially affect your total payments over time. Securing a lower rate today could save you thousands of dollars over the life of your mortgage. For example, locking in a rate that’s just half a percentage point lower than your current mortgage could save you tens of thousands of dollars in interest over a 30-year loan.
More inventory options
The increased purchasing power that comes with lower interest rates means you can widen your home search to include larger or more luxurious homes that were once out of your price range. Whether you’re eyeing homes with more square footage, higher-end finishes, or additional features like a home office, pool, or outdoor living space, you’ll find that more options are suddenly available to you.
Tips for a smooth transition
If you're considering upgrading, here are a few tips to ensure a smooth transition:
1. Get pre-approved for a mortgage
A mortgage pre-approval can help you better understand your loan options. Your lender can advise you on how much down payment you'll need and what your monthly payments will look like, giving you a clear picture of your financial commitment before you start house hunting.
2. Work with a real estate agent
Navigating the real estate market on your own can be overwhelming, especially if you’re upgrading to a home in a new price bracket or neighborhood.
A knowledgeable agent can help you in several ways:
- Market insight: An agent will have up-to-date knowledge of the local market, including which neighborhoods are in demand, which properties are priced competitively, and what homes are likely to appreciate in value.
- Tailored home search: Your agent will listen to your needs and preferences and then tailor the home search to match your criteria.
- Negotiation expertise: A skilled agent can also negotiate on your behalf to get the best possible price and terms for your new home.
- Streamlined process: From scheduling viewings to handling paperwork, a real estate agent will manage the complexities of the home-buying process, allowing you to focus on making the best decision for your family.
3. Plan for additional costs
Many buyers focus solely on the mortgage payment, but owning a larger or more valuable property often comes with increased expenses. Here are a few costs to potentially consider:
- Higher utility bills
- More maintenance and repairs
- Higher property taxes
- Increased insurance
To avoid any financial surprises, make a detailed budget that accounts for these extra costs before you finalize your decision to upgrade. It’s also a good idea to build a financial cushion for unexpected expenses.
4. Time your sale and purchase strategically
Timing is critical when upgrading to a new home, especially if you’re selling your current property to finance the purchase. Coordinating the sale of your existing home with the purchase of a new one can be tricky, but proper planning can help you avoid costly delays and minimize disruptions.
One strategy is to try to sell your current home before closing on your new one. This can free up equity for a down payment on the new property, reduce the likelihood of carrying two mortgages simultaneously, and allow you to negotiate from a stronger financial position.
If selling and buying at the same time isn’t feasible, consider bridge financing. A bridge loan is a short-term loan that allows you to cover the gap between buying a new home and selling your old one. While it’s a temporary solution, it can be helpful in competitive markets where you need to act fast to secure your dream home.
If you're ready to explore your options and take advantage of today’s lower mortgage rates, call our Home Loan Help Desk or apply today to get started on securing your dream home. We can help you understand your loan options and how to reach your homeownership goals.