Home prices have risen substantially over the last two years in St. Louis. This is making some would-be home buyers reluctant to make a purchase now, but with interest rates still at historic lows, this is a great time to buy a new home.
So why do low interest rates make this such a great opportunity to buy?
Small changes in interest rate can make a substantial difference in how much you will pay every month. For example, a $150,000 loan in 1990 would make your payments be $1,331 per month and you would still pay less than if you took out a $250,000 mortgage in 2015 having a payment of only $1,173!
Why such a difference?
Well, the average interest rate has fallen substantially since then – 10.13% in 1990 vs. 3.85% in 2015. There are other factors that come into play when trying to compare two different time periods (such as the rise in real estate prices, income, inflation, etc.), but simply looking at interest rates, a borrower can afford a much larger mortgage now due to historically low rates.
What does this mean for you?
If you’re looking to sell, now might be the to do it. Since real estate prices have risen so much in the last two years, you may have one of your best selling opportunities now and with interest rates low, you also have a great opportunity to move up in home while paying less than when interest rates eventually rise.
And if you wait?
When interest rates start to increase, as they are expected to do in 2017, your purchasing power will decline as the mortgage payment will increase as the interest rate does. Oh, and by the way – other buyer’s purchasing power will decline as well making it more difficult for them to pay top dollar for your home.
Here’s a chart to help illustrate the power of interest rate on your purchasing power over several years. This shows what your mortgage payment would be if you took out a $250,000 mortgage in 5 different decades. You can find the historical interest rate on Freddie Mac’s website.
| Year | Average Rate | Mortgage Payment |
| 1975 | 9.1% | $ 2,021 |
| 1985 | 12.4% | $ 2,655 |
| 1995 | 7.9% | $ 1,822 |
| 2005 | 5.9% | $ 1,478 |
| 2015 | 3.9% | $ 1,172 |
As you can see, your mortgage payment would have decreased substantially thanks to the declining interest rates. Put another way, here’s how much you can afford in each of the same time periods keeping the mortgage payment the same but adjusting for the interest rates.
| Year | Purchase Price |
| 1975 | $ 145,012 |
| 1985 | $ 110,378 |
| 1995 | $ 160,795 |
| 2005 | $ 198,238 |
| 2015 | $ 250,000 |
Bottom Line
High Real Estate Prices + Low Interest Rates = Good (for Sellers who want to buy)!
It’s never advisable to try to time the market, but as we continue to see historically low interest rates and rising home prices, now might be the right time to sell a home and to purchase another. If you wait, you could be stuck trying to sell in a time when borrowers aren’t able to afford as much, thereby pricing some buyers out of being able to purchase your home.
Not convinced yet? Here are 5 reasons why now might be the time to sell.