The recent drop in the U.S. mortgage loan rates is great news for both homebuyers and homeowners. Simply put, lower rates means the buyer has more purchasing power and their payments will be lower. Homeowners can refinance their mortgages to lower rates and use their savings for home improvements and other expenditures. This drop in mortgage rates can be beneficial for many.
When buying a home, it is common for buyers to get pre-qualified. Just by obtaining a pre-qualification letter, buyers know in advance what they can afford. This also can help during the negotiation process, as sellers already know the buyer is approved and don’t have to wait to hear from the bank on the loan. As a result of being pre-qualified, this results in shorter closing times, which is appealing to both buyers and sellers. With lower interest rates, buyers may be able to purchase a larger home and still have a reasonable and affordable payment.
How the Mortgage Rate Drop Helps Homeowners
Homeowners can also benefit from these drops in the mortgage rate. Homeowners can refinance their current mortgages to these new lower rates and realize significant savings in interest over the course of the loan. As a result of this lower payment, many homeowners will use these savings to their benefit.
When a homeowner takes advantage of lower mortgage rates and saves money on interest, they have more disposable income. A homeowner may choose to reinvest some of these savings into their home by completing improvements or additions. They may use these savings to take a vacation or make another large purchase. Some will put these savings towards paying down other debt they may have. All of these actions have positive effects on the economy.
How the Mortgage Rate Drop Benefits Homebuyers and the Economy
The reduction in mortgage rates obviously benefits homebuyers, sellers and homeowners. This also benefits the economy. Low interest rates can create a rise in the amount of homes purchased. This positive increase in the housing market creates an increase in other economic sector. Homebuyers will likely employ inspectors and movers. Many times they will purchase new items for their new home. Often the new homeowner will hire painters and contractors to perform work in the house. All of these things create jobs and spur the economy. This ends up benefiting everyone.
Another positive outcome of the reduction in mortgage rates in the US is the increase in home ownership. When more Americans own homes, it helps to stabilize neighborhoods. Homeowners constantly invest in their home, which in turn helps to benefit a community. The community receives revenue from day-to-day expenses as well as taxes collected on the property. All communities need a strong tax base to operate effectively.
Reductions in the mortgage rates can only be seen as a positive indicator for the economy. This increases home ownership and allows for an influx of potential spending from consumers.
About Greg
I don’t feel like getting in a debate about economic theory on this post, but artificially low interest rates were a huge cause of the housing bubble and subsequent collapse. Keeping rates artificially low and spurring economic activity based on manipulation of rates ultimately is not sustainable.
DC @ Young Adult Money recently posted..Ways to Increase Income
Being this is a guest post, I kept my personal beliefs out of the post. However, I’d amend your “artificially low interest rate” statement to “artificially low introductory interest rates that later adjust to a higher rate” were a huge cause of the housing bubble. Those with fixed rates had very little problem.
I’m with David on this. Somehow lowering the rates for people that got into trouble in the first place doesn’t make any sense. Sure you’re helping them out short term, but isn’t it just perpetuation more problems for people who think low mortgage rates are good enough reason to buy in?
Veronica @ Pelican on Money recently posted..10 Cheapest Cars for 2013
wow my spelling is terrible here!
Veronica @ Pelican on Money recently posted..10 Cheapest Cars for 2013
I totally agree with the long-term thought that these low rates could negatively affect inflation. However, rates are low for everybody, not just those who got into trouble.
EXACTLY!!!!!
The low interest rates does have many positive factors, but with positive factors comes with negative factors as well. I wouldn’t go as far as to say it can be only seen as a positive factor.
True. Inflation is certainly affected.
I agree with the others. The low interest rates are GREAT if you’re wanting to buy a house
Michelle recently posted..Should I still be anonymous?
Great for your future rental empire, Michelle:)
I would also question the theory that taxes from homeowners are a boon to the community. In many communities, property taxes on rental properties are significantly higher than property taxes owner-occupied (homesteaded) properties. The county is actually “losing” revenue in property taxes the higher the ownership rates go…
Mrs. Pop @ Planting Our Pennies recently posted..How Do You Go From Minimum Wage to $80K In A Year? Part 1
I agree that now, as long as it makes sense for you, is a great time to buy a house. I wish I had more money so I could buy a few as rentals.
John S @ Frugal Rules recently posted..Blogging Tips From a Beginner
Me too…:)
It can be debatable topic that low interest rates are good or bad but for real buyers it is great. With low interest rates you can save money or can pay your loan very early.
Low interest rates definitely increase purchasing power and it can also increase inflation.
Ravi Ahuja recently posted..Your Home and Jewelry Is Not Your Investment
I think everybody here is hitting the nail on the head today. The low rates are – indeed – great for buyers. The trick is to balance that with inflation.
Very educated comments… There really is 2 sides to the story with manipulating interest rates. One one side you can save money in buying a house which is great for the individual buying or refinancing (heck I’ve made out here). But, manipulating interest rates also causes inflation which no body likes.
Jason Clayton | frugal habits recently posted..5 Tips for Getting a Higher Starting Salary
That is absolutely true. It is a double edged sword.
There’s been a lot of good comments here. It’s true that low interest rates are great for people buying a house. But the fact remains that not everyone should own a house. Low interest rates encourage a lot of people that are really on the borderline of being able to afford a house to jump in and go ahead with the purchase for fear of missing out on the low rates.
I’m not going to debate monetary policy, but I think the Fed has pretty much exhausted their arsenal.
Justin @ The Family Finances recently posted..Friends of the Family: Windy Weekend Edition
Yes they sure have – the Fed that is.
We recently took advantage of the rate plummet coupled with our improved credit rating to refinance. Hopefully, you will be able to take advantage when you purchase a new home.
Michelle recently posted..Shortcuts to Financial Freedom
We hope so too;)
Rates are great if you are looking to buy but lousy if you are nearing retirement and need to put part of your nest egg into a CD or savings account. I don’t mind right now because I am looking to buy rentals, but I don’t think manipulating the rate for so long is always a good idea for everyone.
Kim@Eyesonthedollar recently posted..Can You Avoid Spending Money on School Fundraisers?
Very true. Lower rates encourage riskier investments, which benefits those who know how those investments work.
low interest rates are going to be the downfall of AMERICA. For goodness sake – we took advantage of the “no cost harp refinance” – you know, the one that was supposedly put in place to help out people who had lost their jobs or otherwise got screwed by omana-econonics! Hell! it worked out great for us but it sure as hell didn’t help anyone who actually needed the help. smoke and mirrors! it’s all crap and people are going to suffer because of this. total crap!!!!!