Phoenix, AZ – December 23, 2009 – (RealEstateRama) — Long-term mortgage rates fell to a new low in December, according to the Phoenix Business Journal, with a 30-year fixed-rate mortgage averaging 4.71 percent, the lowest rate since at least 1971, when Freddie Mac started keeping track.
While this is excellent news, it is important for investors to remember that much like credit cards, an interest rate is heavily dependent on the borrower’s credit history. According to Ron Kuhn, Senior Mortgage Planner at AmeriFirst Financial, investors often mistakenly believe that all interest rates are equal from borrower to borrower; however, it is much more involved that just a current rate quote. Most are locking in rates that fall between 4.875% and 5.125% due to factors such as loan size, property type, Loan to Value (LTV) and credit scores.
For example, borrowers must have a minimum FICO score of 620 to qualify for the first four properties they purchase, and a minimum 720 score for properties five through ten. Depending on their specific score, there typically are penalties in the form of added interest. Plus, there is always an additional one-time closing cost fee wrapped into all investor loans that can range between 1.75% – 3.0% depending on the down payment invested at closing.
Many chose to finance this along with the principal, further increasing the monthly payment.
HOP OFF THE FENCE AND ACT NOW
What does the interest rate reduction mean to the investor? It doesn’t impact the big fish buying 100 homes at a time with cash, but it means a very sweet deal for those who rely on financing to purchase their investment properties. For those hovering on the fence, this interest rate is probably as low as it will go, and now is the time to act. Waiting until the rate creeps up even a quarter of a percent will cost you thousands.
As the interest rate drops, so does the resulting monthly payment – meaning those who would have just barely missed qualifying might be approved at the lower interest rate. As interest rates and prices change, new qualifiers are able to join the pool of eligible borrowers.
DO THE MATH
Consider this scenario. Investors are snapping up AZ investment properties that are priced around $100,000. Using the highest interest rate mentioned above at 5.125%, the monthly payment is estimated at $545/mo (principal and interest only, tax and insurance is not included) and the total cost of the purchase with interest to around $196,015.
That same $100,000 financed at 5.625% – a half a point higher – increases your monthly payment by nearly 6%, and your total cost of the purchase increases by over $11,000! The equivalent of more than two years of rent payments – a pretty expensive cost of waiting.
Or, to look at it from another perspective… That original $100,000 invested at today’s value would buy you a three-bedroom, two-bath home in an average part of town. By investing the same amount now that you would spend if you wait a year (that extra $11,000), you would be investing around $600/mo for your mortgage payment, but you would end up with a larger home in a better neighborhood, possibly commanding around $1,495/mo in rent – a much more profitable investment.
WHY IS TODAY UNIQUE?
Normally, when prices go up, interest rates drop down. Because less people can afford to buy, the banks become more aggressive in their rates to keep business thriving. In the Phoenix market today, prices AND interest rates are outrageously low. This is a very unique situation that won\’t last. The numbers are simply not sustainable as the economy improves. Either prices will recover or interest rates will normalize at a higher rate.
If you are waiting for the perfect time, act now; it isn’t likely to get any better than this.
122209 © Dave Zundel, HomeLovers
About Dave Zundel
Authored by Dave Zundel, Co-Founder of HomeLovers and active real estate investor At age 40, Dave Zundel had accumulated an investment portfolio of 15 homes and retired as a successful CEO for a Phoenix company, where he drove aggressive growth from 300 homes under management to nearly 2000 homes. After nurturing an idea for a dramatically improved property management model, he co-launched HomeLovers, which is now one of the fastest growing real estate investment and property management companies in Arizona. He can be reached via his blog at www.arizona-investment-properties.com.
Disclaimer: No two investors have exactly the same situation and needs. Before making any investment, you should review your specific objectives with a qualified investment expert to make sure the investment has the potential to meet your objectives. This is especially true in real estate investing, where buying the wrong property can be catastrophic. For more information, please see the HomeLovers article on “How to Select a Property Management Company.”
HomeLovers does not intent to provide specific investment, legal or tax advice. Investors should consult with an advisor regarding the appropriateness of investing in any particular property or investment strategy. HomeLovers disclaims any liability for the accuracy, timeliness or completeness of data in this article. Any investment returns, performance or information is not necessarily indicative of future returns or performance.