As we step into the bustling world of 2024, my journey as a Realtor takes a new turn – diving deep into the ocean of financing through my mandatory Continuing Education (CE).
This year, it's about unraveling the complexities of real estate financing, a skill every homeowner yearns to master. Intriguingly, my course unravelled a concept that's set to revolutionize how we perceive mortgages.
"Rent the Rate, and Buy the Home," a catchy phrase coined by our insightful instructor, captures the essence of this idea. It’s more than just a statement – it's a gateway to understanding how refinancing can be a game-changer in your home-buying journey, allowing for adaptability in an ever-fluctuating market.
When you go to buy a home, most people will have to take out a loan or better known in the Real Estate industry as a mortgage. This mortgage comes with an interest rate.
There are a couple of ways you can accept this rate. You can lock in for the life of the loan (15 or 30 years), or you can have the interest move along with the market.
Either way, you always have the option to refinance the loan. What does that mean? Well in short you are replacing your current loan with a new one. It is like you are closing on your home again.
So why would someone do this? Well depending on the mortgage you take out, and several other factors. If you were to get a mortgage rate today it would be anywhere from 6-7% or even more
In recent history, that is considered high. Here in Connecticut our mortgage interest rates are not only high, home prices continue to be higher than they were only a few years ago.
With both of this factors going against Connecticut homebuyers, buying in this market can be really expensive. That is where refinancing down the road can safe these homeowners thousands in interest.
Say you bought a house now with a 7.5% interest rate for a 30 year mortgage. Let's say the loan amount is $300,000. That is around $2,100 a month, not including taxes, insurance, and any other built in expenses.
Now we are 5 years into the future, interest rates have dropped down to 4-5%. Your 7.5% rate is fixed, what can you do, to bring it down to the market rates? Refinance!
If you were making minimum payments for 5 years, your $300,000 loan is now $284,000. Now say you refinance the balance on the loan with a 5% interest rate for 30 years. That is $1,525 a month, your mortgage just went down almost $600 a month.
If you were to keep your current rate through the life of the loan, it would have cost you over $755,0000. Add the 5 years you paid $2,100 plus the new loan, you are at $675,000, that is $80,000 you safed by refinancing.
Now if you had a variable rate, which goes as the market does, yes you wouldn't have had to pay $2,100 for 5 years in that scenario, but those type of loans can be tricky, especially if interest rates went up instead of down.
Say you have a variable rate, and the market is at 5%. You think to yourself, it won't get better than this, you can then refinance into a fixed rate. Interest rates go up again, and you are sitting cozy at 5%.
This is what my instructor meant by "Rent the Rate, and Buy the Home." Refinancing is the main reason for this phrase, but not the only one. Life can get in the way.
Did you know the average American stays in their home for 7 years. So chances are you aren't going to payout that loan over the 30 year timeframe.
Let's go back to our 5% rate after 5 years. You refinanced and have been paying $1500 a month. We are now in year 10, and you got a job offer out of state.
After closing costs of $20,000, and paying off your loan, you are left with roughly $70,000. Interest rates have fallen to 4%, and home values in your new location aren't as high.
You find a home like your old one, but for only $275,000, you use the $70,000 as a downpayment and towards closing costs. Now you have a $215,000 loan at 4%. Congratulations your payment is around $1,000 a month.
Obviously that is one scenario that works out in your favor, clearly the opposite can happen too. The point is, the interest rate you are getting today, most likely won't be the one you have in the future.
If you are ready to buy a home for whatever reason, or if you need to sell your home, contact me Carlos, your Hometown Realtor! Don't be afraid of high interest rates, because you are only renting them👍
Disclaimer: I am a licensed Realtor, not a Mortgage Broker, the information above is for entertainment purposes only, and is limited to my scope of the mortgage industry. I would highly recommend speaking with a mortgage professional to verify any information above.
