Federal Reserve drops interest rate .25 percent finally

By Matthew Trudel

The Federal Reserve lowered the benchmark interest rate by a quarter of a percent (.25 percent) last week. This is the first rate cut this year, and they seemed to signal there will be a series of cuts to follow suit.

This is meant to lower interest rates and provide some relief to consumers. This does mean mortgage rates will go down slightly, but it is not immediate. This takes a little time for the market and banking industry to adjust.

What does this mean for buyers and sellers in today’s market?

For buyers it means several things. The first one is obvious that hopefully they can lock in a lower interest rate when they find the property that they want to purchase.

Rates are currently fluctuating right around 6.5 percent with good credit. I can see the rates being in the 6.25 percent to 6 percent range in the near future. This change in rate also helps buyers in another way that many people don’t think about.

The lower rate now gives the buyers more purchasing power.

Buyers gain more purchasing power with a lower interest rate because the loan amount can be higher than the previous loan amount and still keep the payment the same.

For example, let’s just say a buyer has a loan amount of $400,000 with an interest rate of 6.5 percent and the payment is $2,528. Now if the interest rate drops to 6 percent the buyer can keep the same payment of $2,528 and can increase their loan amount to $421,695. This translates to them being able to look at homes $20,000 to $25,000 higher in price or compete against other buyers for a property and offer is higher price.

This is also good news for all of you sellers out there.

The lower rate will help sellers out when they decide to put their property on the market if it isn’t already listed and on the market. The lower rate gave buyers more purchasing power as we just discussed. This means more buyers can afford to purchase the seller’s property. So now the seller has a larger pool of buyers and potentially more competition from those buyers.

With the Federal Reserve signaling another lowering of the rate may be coming, should buyers wait to purchase a property?

That is more of a personal decision that should be made about what your current situation is. Everyone has different reasons and motivations for purchasing a property. I personally think buyers should not wait in hopes of a lower interest rate.

The old saying is “You marry the property, but date the rate.” This just reminds buyers that if the rate does go down significantly that they can refinance in the future.

Speaking of refinancing a property, current property owners can benefit from the Federal Reserve lowering the interest rate as well.

Current property owners who may have purchased their home in the last year or so should keep an eye on what the Federal Reserve does in their next few sessions. It appears they plan to make another rate cut in the next session and maybe a couple more rate cuts.

So, when is it a good time to refinance or how much of a change in your rate makes it worth it to refinance?

The general rule is you need to be getting at lease a rate 1 percent lower than your current rate. I usually say at least 1.25 percent lower. There are other factors as well to take into consideration like closing costs and the term of the loan. You should also calculate how long it will take you recoup those closing cost from the amount you will be saving with this lower rate.

All in all, we are heading in the right direction with this rate drop and hopefully the Federal Reserve follows through in the next session with another rate cut.

This article was written by Matthew Trudel, Owner/Broker of Five Star Realty, Windham, 207-939-6971. <