How Do Interest Rates impact Buyers? 

On July 31st of this year, the Federal Reserve lowered the Federal Funds Rate 25 basis points in a much-
anticipated move. As a mortgage broker, I’ve fielded many questions from our firm’s clients about this
development. Specifically, people want to understand how this shift in policy impacts their mortgage and
buying power in the future.

How does a Federal Reserve rate cut impact mortgage rates?

The short answer I give to my clients is to pay attention to the 10-year treasury bond rate. There is a
common misconception that the Federal Funds Rate directly correlates to mortgage rates. Instead, the
10-year treasury bond is the main index lenders use to price mortgage rates. The reason? While most
mortgages are 30-year products, those mortgages typically get paid off within 10 years, making it a great
benchmark to determine where rates are going.

To provide an illustration, if you look at the 10-year treasury rate between January 2019 (around 2.75%)
and August 2019 (around 1.66%), that 100 basis point drop is a direct correlation to how the conforming
30-year fixed mortgage rate has performed. In January 2019, that rate was around 4.5% and in August
2019 that rate is in the 3.5% range.

What are things to consider as a potential homebuyer?

1. Low interest rates represent higher home buying purchasing power

Let’s say you’re applying for a 30 year fixed mortgage loan for a new primary residence and have been
prequalified to borrow up to $400,000.
Last year, assuming a 740+ credit score, a 30 year fixed rate would have been in the ballpark of 4.75%. The
principal & interest payment would be $2,075.43 per month.
In today’s environment, that rate could be as low as 3.5%. on conforming loan amounts (<$484,350). The
principal & interest payment would be $1,790.54 per month. That’s a difference of $285 per month.
That also means, in today’s low rate environment, you could get approved up to $463,500. The principal &
interest payment would be $2,075.43 per month at 3.5%.
The drop in rates represents an ability to borrow up to $63,500 more.

If you don’t envision owning your home for longer than 7-10 years, you might consider refinancing into a
10-year fixed Adjustable Rate Mortgage (ARM). A 10-year ARM is amortized over 30 years but offers a
lower interest rate than a traditional 30-year mortgage for the first 10 years. This can be a great way to
save on interest payments. For example, if you compare a $1MM loan with a 30-year fixed rate at 4.25%
to a 10-year ARM at 3.125%, there is an interest savings of nearly $107,000 over 10 years. Typically, you
can refinance as much as a $3MM loan balance into this type of loan.

2. Look at a 15 or 20 year mortgage

Ideally, we all would like to pay off our debt in as short and inexpensive way as possible. In comparison to
a 30 fixed mortgage, 15 & 20 year fixed options offer lower interest rates. The amount of interest you pay
over the term of a 15 or 20 year fixed loan compared to a 30 year fixed mortgage is drastically lower. In
fact, many financial advisors and personal finance experts recommend homebuyer’s utilize15 year fixed
mortgages.
So why do most buyers not finance their mortgage into a 15 year fixed loan?
They can’t budget the higher monthly mortgage payment of a 15 or 20 year fixed loan into their budget.
There’s too many other expenses, whether it be putting money away for retirement, school tuition, or
lifestyle expenses.
Assuming you can comfortably budget a 15 or 20 year mortgage payment, it’s a great financial tool to
build up equity in your home quickly and eliminate interest expense.

3. Adjustable Rate Mortgage option

Consider this example. Say you don’t envision owning your home for longer than 7-10 years. You might
consider a 10-year fixed Adjustable Rate Mortgage (ARM). A 10-year ARM is amortized over 30 years but
can offer a lower interest rate than a traditional 30-year mortgage for the first 10 years. This can be a
great way to save on interest payments. For example, if you compare a jumbo $1MM 30-year fixed rate at
4.0% to a 10-year ARM at 3.125%, there is an interest savings of nearly $82,000 over 10 years when you
compare them side-by-side. That’s a massive amount of savings. If you select the 30 year fixed option and
moved in year 10, that’s $82,000 in interest you didn’t need to pay.

As you can see, the reasons to pay attention to rate changes are many and varied. However, as a
homebuyer, low interest rates represent a great way to increase your borrowing capacity and save
thousands of dollars in interest over the life of your loan.

Making the decision to buy a home can be an overwhelming. Tim O’Brien, at Zipfel Capital, can help you understand opportunities that will provide clarity in a complex situation like purchasing a home.

About the Author

Tim O’Brien is an equity partner in Zipfel Capital, a mortgage brokerage company
based in Hyde Park, specializing in residential and commercial lending. Tim has
been acknowledged by the Greater Cincinnati Mortgage Bankers Association
(GCMBA) as a Diamond Level Producer, given to less than 1% of industry
professionals. He has also been featured in the Cincinnati Business Courier’s “Ask
the Expert” series. Tim holds a bachelor’s degree in Xavier University and is a
graduate of The Summit Country Day School. He lives in Mt. Lookout with his wife
and three children.

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