In October 2018, interest rates on 10 Year Treasury Bonds peaked at approximately 3.25%. As of early June 2019, these rates have dropped to less than 2.10%. This is a dramatic move in interest rates in both absolute and relative terms. As a result, we have seen interest rates on 30-year mortgage drop from approximately 5% to 4% or less over the last eight months. On a $200,000 mortgage, that takes a mortgage payment from $1073 per month to $954 per month, a savings of nearly $120 per month. Over the course of a 30-year mortgage that would save the average consumer over $43,000 of interest costs.
This makes managing mortgage payments within your budget more comfortable. It also makes buying a home more comparable, and in some cases less expensive than the rental equivalent for an apartment. People are able to qualify for loans more easily. This is spurring competition for the homes that do come on the market since inventories are at a relatively low level. It is not uncommon for homes to sell within hours to days of going on the market for full price or more.
As interest rates have been rising for most of the last two years, home financings have slowed dramatically. However, we are starting to get questions about this once again. The historical rule of thumb is that interest rates have to drop 1% or more to make refinancing attractive. However, the main issue that has to be considered is the savings on a monthly basis of lower interest rates and lower mortgage payments compared to the cost of refinancing, and the timeline you plan to stay in the house. You generally want to recoup your refinancing and closing costs within 12 to 24 months of refinancing to make it attractive. You may also need to stay in the house 3 to 5 years or longer to maximize these benefits.
There are also economic benefits from these lower interest rates. As housing generally makes up 15% or more of GDP, lower interest rates will spur more housing activity which should be additive to the US economy. This is important as the economic recovery cycle that we are in now is 10 years old and appears to be in its latter stages and the economy's growth rate has recently been slowing.
We at Impel Wealth Management will continue to monitor these trends. Whether you or a loved one are looking to buy a new home, find that perfect vacation home or refinance an existing home, please do not hesitate to give us a call to discuss. These are extremely important cashflow and wealth building decisions and we want to keep you "Moving Life Forward" towards your ultimate financial and family goals.