How much can you save with lower interest rates?

A little number won’t make a big difference, right?  Too often, that’s the mentality consumers have when purchasing things and using debt to pay for it, whether it’s a new car, putting that big vacation on a credit card, or even taking out a mortgage loan for their house.  Wrapped up in the minutiae and excited about the purchase, consumers often take the first loan that is given to them or don’t adequately research or shop around for the best interest rates.  But the difference in payments you make over the life of the loan can be HUGE!  In fact, the high debt load and high interest rates many families face keep them financially stunted, holding them back from filling up their savings account, funding retirement and investments, and paying off their mortgage. 

So we decided to take a look at just how much money you can save – or spend- depending on small interest rate changes with different types of debt.  Thanks to debt calculators at BankRate.com, we have some telling statistics for you.

"But wait, how do I GET the best interest rates?" you may be asking.  You can’t control where interest rates are these days, but what you CAN control are the factors that will allow you to get the BEST interest rates, no matter what the market is doing, and the most important is your credit score.  

Mortgage:

Let’s assume that today’s national averages are around 4.5% on a 30-year fixed mortgage loan.  By the way, those rates are near historical lows as the all time national average is closer to 7.5%.  So if we compare those two numbers on a $250,000 home purchase over 30 years…

Loan amount: $250,000

Interest Rate:  7.5%

Term: 30 years (360 months)

Monthly Payment:  $1,748

Total Payments:  $629,280

Total Interest Paid over Life of Loan:  $379,280

Or…now, let’s look at that same home loan but with a good interest rate these days, 4.5%. 

Loan amount: $250,000

Interest Rate:  4.5%

Term: 30 years (360 months)

Monthly Payment:  $1,266

Total Payments:  $455,760

Total Interest Paid over Life of Loan:  $205,760

Total Savings:  $173,520

Student Loans:

Loan amount: $29,600

Interest Rate:  3.9%

Term: 10 years

Monthly Payment:  298

Total Payments:  $35,760

Total Interest Paid over Life of Loan:  $6,160

Or…let’s look at a typical interest rate for a private student loan or for a borrower with marginal credit.

Loan amount: $29,600

Interest Rate:  7.75%

Term: 10 years

Monthly Payment:  355

Total Payments:  $42,600

Total Interest Paid over Life of Loan:  $13,000

Total Savings: $6,840

Car loans:

Loan amount: $25,000

Interest Rate:  4.5%

Term: 5 years (60 months)

Monthly Payment:  $466

Total Payments:  $27,960

Total Interest Paid over Life of Loan:  $2,960

Or…

Loan amount: $25,000

Interest Rate:  7.0%

Term: 5 years (60 months)

Monthly Payment: 495

Total Payments:  $29,700

Total Interest Paid over Life of Loan: $4,700

Total Savings:  $1,740

Credit cards:

Loan amount: $20,000

Interest Rate:  18.0%

Monthly Payment: $500

Term: 62 months

Total Payments:  $31,000

Total Interest Paid over Life of Loan: $11,000

Or…

Loan amount: $20,000

Interest Rate:  10.0%

Monthly Payment: $500

Term: 49 months

Total Payments:  $24,500

Total Interest Paid over Life of Loan: $4,500

Total Savings:  $6,500

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If we add up all those loans with lower interest rates compared to their higher-interest counterparts, we see that you’ll save $188,600 by the time you’ve paid everything off.

Even if you take out the big loan – the home mortgage – you’ll still have saved $15,080 on your auto, student, and credit card loans. 

Those are HUGE numbers and now multiply it by how many cars/kids in college/credit cards your family has.  Even bigger, think about the power of if you used that savings to get out of debt sooner by paying these loans down faster and then used the extra time/money to fund investment that actually brought you a rate of return!  The final outcome can be staggering – literally allowing families to live comfortably and retire early versus struggling with bills and finances every month. 

6 BIG questions about our Sacramento real estate market.

Have you heard the news?  No, not that Kim and Kanye named their new baby after a point on a compass, or that the government is looking at all of our emails (can we ask the government to please delete some of our spam?) but that the Sacramento real estate market is on the move.  Things are heating up like the temperatures this summer, but there are some aspects to the market that are truly remarkable.  So what 5 questions might we have about the current Sacramento real estate market?  Here they are:

1. Is Sacramento still plagued by defaults?

The Notice of Default rate continued to increase modestly month over month and year to date.  Important to keep in mind these numbers are well below 2012 at the same time. We have seen a decline in total notices, depending on county, of 40% to 50%.  The strain of distressed properties is being alleviated as the market absorbs the inventory and lenders finish up their modification, short sale, and foreclosure process. 

2. Will rising interest rates slow our local market?

The last couple of years, we’ve enjoyed historically low interest rates and a tight supply of properties, which led to increasing home prices.  That’s great news!  However, with the recent jump in rates, we’re left wondering if that will cause a slow down in our local market?  Not necessarily. Rates are still amazingly low in context, and home prices at reasonable levels.  Lenders are expected to speed up the process of handling underwater and distressed properties, which will provide us some much-needed inventory.

3. Will first time home buyers get in the game?

Currently, first time home buyers only account for 29% of home purchases, according to the National Association of Realtors.  Normally that would be around 40% of home purchases, so our first-timers are lagging.  Many would-be buyers are being squeezed out as they try to compete against investors.  Hopefully, as rates rise, the investor portion of the market will slow down a little, giving us a more balanced market picture and opportunity for first time buyers to get in the game.

4. Will the decline in distressed properties slow down the investors buying frenzy?

The past year, real estate was seen as the ideal investment for landlords, REITS, and big institutional investors.  Prices were low and they had cash to spend, interest rates were rock bottom, and there were so many defaults and distressed properties that they could scoop up blocks of homes like they were playing Monopoly.  With a bump in interest rates, fewer defaults, and rising home prices, I anticipate the investor frenzy on real estate will cool a little.

5. What other factors impact our local real estate market?

Employment is still key to long term healthy growth.  Builder confidence is high once again, which will bring much-needed inventory into the market.  There has been chatter about the Federal Reserve tapering down their support of the mortgage market and our economy, and we need to see a future where our economy is more normalized without these supports.  But Obama’s administration is also urging banks to make loans available to borrowers with less-than perfect credit, opening up home ownership to first-timers, young people, and those who were hit hard by the recession, but back on their feet.  Hopefully, we’ve learned our lesson that non-qualifying mortgages without equity is a recipe for disaster. 

6. Have we weathered the storm?

Over the past years, the financial and emotional strains of the recession affected most of us.  A healthy real estate market is fundamental to our local and national economy, and the good news is that I anticipate a stabilization of the market as interest rates normalize, supply and demand is balanced, and consumer confidence grows.   As we move to a more stable market I hope we do not forget the mistakes of the past that led us down this path.  

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Do you have questions about our real estate market?  We’d love to answer them for you!  Touch base with us here.