Tax credits for buyers are over, but it’s not the end of the world
Over the past couple of months, we’ve seen declines in homes sales and everyone from the National Association of Realtors (NAR) to economists on television have attributed the drops to the end of tax credits for first-time and repeat buyers.
That’s not hard to understand. The federal government started offering tax credits to home buyers in April 2008 and the final set of credits expired at the end of April this year. It just makes sense that sales would drop after tax credits – some offering up to $8,000 cash back for first time buyers – were removed from the system.
Still, there’s something else out there that can potentially benefit buyers much more than tax credits could – very low interest rates. Rates on 30-year, fixed-interest loans have hovered at 4.5 percent or better lately, meaning a buyer can save far more than $8,000 over the life of a loan.
What’s more, rates on 15-year, fixed-interest mortgages have consistently been in the 3.7 to 3.8 percent lately. That should get a few people excited as financing a home for 15 years rather than 30 translates into a savings of thousands of dollars for buyers over the life of the loan.
Want proof? It’s time for some fun with math. First, let’s take a look at how much interest would be paid on a 30-year, fixed-interest mortgage taken out at the first of October compared to a year ago. We’ll run the same comparison on 15-year mortgages. In both scenarios, we’ll assume the buyer is financing $150,000.
At the first of October, the average fixed interest rate on a 30-year mortgage was 4.32 percent – down from 4.94 percent a year ago. The person financing $150,000 at 4.32 percent would pay about $20,042 less in interest over the life of a loan than he or should would if financing at 4.94 percent.
When it comes to a 15-year mortgage, the average interest rate at the first of October was 3.75 percent – down from 4.36 percent a year ago. The person financing $150,000 at 3.75 percent would look at a savings of around $8,272 in interest compared to a mortgage at 4.36 percent.
Now, here’s the kicker. It wasn’t that long ago that people were more than a bit skittish about taking out 15-year mortgages because those mortgage payments are higher than what is available with a 30-year mortgage. However, low interest rates mean that more people can afford those 15-year mortgages. Moving from a 30-year to a 15-year mortgage translates into an impressive savings in interest.
Looking again at our $150,000 loan, let’s consider the interest saved with a 15-year mortgage at 3.75 percent compared to a 30-year loan at 4.36 percent. The person taking out the 15-year mortgage will pay about $46,350 in interest over the life of the loan, whereas the buyer taking out the 30-year loan will pay around $117,865 in interest. That’s right – the person looking at the 15-year mortgage is looking at around $71,515 in savings over the life of the loan.
Here’s another thing to consider. The NAR has stated time and time again that sales prices are in decline, partially because sales have dropped as markets react to the removal of tax credits for buyers.
That means the buying power of the consumer is at its peak when both lower home prices and interest rates are factored into the equation. The buyer who can now take advantage of those lower rates and swing a 15-year mortgage is in for some incredible savings, but the person who has to look at a 30-year loan because lower monthly payments are essential can save a nice chunk of change, too.
The advantages to both buyers and people wanting to finance are obvious enough. For more information, visit a mortgage banker and see for yourself how lower interest rates increase your purchasing power.
Column written on behalf of the Mortgage Bankers Association of Arkansas and distributed to Arkansas publications.
Benton resident. Rogue journalist. Recovering attorney. Email = Ethan@FirstArkansasNews.net.