Those in the real estate industry are well aware of the fact that interest rates for loans have been lowered by the Federal Reserve over the last couple of months. This reduction in turn lowers the interest rate paid by a borrower for a loan with their bank. Lower interest rates have caused a large increase in loan “refinancing.” Refinancing simply means replacing your existing home loan or commercial loan with a new loan at a lower interest rate to save financing costs or to increase the amount borrowed without affecting monthly payments. For example, if a consumer borrows $200,000 at 4.0% interest with a 30-year term, their monthly payment would be $955. That same loan at 3% interest would result in a monthly payment of $843. The benefit is clear: under this scenario, a consumer would be paying $100 less per month for the same borrowed amount. Who wouldn’t want to save a $100 a month on their monthly payment?!!
So, people are refinancing their home loans and other commercial loans. But how does that affect a Realtor?
As a buyer’s agent, you are well aware of your client’s “buying power.” Meaning: what can your buyer afford? At the end of the day, what your buyer can afford translates to “what payment can they afford.” With lower interest rates, principal goes farther and a buyer can afford payments on a larger mortgage and ultimately the buying power of a buyer increases. Therefore, what houses you are showing a client could change. Even more important is if you have a Buyer that was pre-approved several months ago and has not yet found a home to purchase, it would be wise to have the buyer update their pre-approval.
As a seller’s agent, you are often tasked with consulting with your client on how to reach a listing price for real estate. Through comparable sales, inventory and available potential buyers, a list price is reached. As discussed above, due to lowered interest rates, the buying power of potential purchasers has increased. Based upon the increased buying power, there could be a larger pool of potential buyers for your list property. Therefore, the list price may be increased if supply does not support the potentially higher demand created by the larger pool of buyers. It’s basic economics. However, the interest rates decrease is certainly important to evaluate when consulting on establishing new list prices.
Of course, this post is not encouraging agents to encourage buyers to purchase to the maximum amount of their financing ability or to encourage the increase on listing prices of property. Each transaction will require the expertise and market knowledge of a Realtor to make those determinations. Rather, this post is meant to spur the discussion of market impacts due to lower interest rates, especially in the Riley, Geary, Pottawatomie and Wabaunsee County markets. Our team at Tallgrass Title understands the market impacts caused by interest rate changes and have recently seen a significant increase in refinance title insurance orders. We are happy to discuss these changes and how they affect your clients. It’s our job!