What Is Borrowing Power?

Jay Even Schoenfeldt | June 15th, 2021
 
Everyone is talking about low-interest rates. We all know that a low rate is better than a high one. Many of my clients first think of lower rates as a way to save money, manage their expenses, and pay less interest over the course of a loan. While this is true, there is another hidden benefit to having low-interest rates and it is a major factor driving home prices in today’s competitive market. 
 
Let’s talk about borrowing power.
If you have ever thought ‘How much can I afford?’ you innately understand borrowing power. In official terms, borrowing power is “the amount of money a person, company or government can borrow at a particular time based on their financial situation.” 
 
Case Study
Let’s say you want to buy a home with this week’s low-interest rate of 2.875%. The logical first step is to speak with a loan broker to get pre-approved for a loan. The loan broker tells you that $7,000 is your maximum monthly loan payment based on your current income and expenses which equates to borrowing $1,687,184 with Jumbo financing at a 30-year fixed interest rate of 2.875%.
 
Let’s go back in time to May 2019 when the average Jumbo interest rate was 4.25% and compare the difference in your borrowing power. Your maximum monthly loan payment would have still been $7,000 assuming all factors aside from the interest rate were the same; however, with a 4.25% interest rate, you would have only been able to borrow $1,422,938 – a difference of $264,000.
 
Borrowing Power 2021 vs. 2019
Year
Int. Rate
Payment
Loan Amt
Source
June ‘21
2.875%
$7,000
$1,687,184
Ally (Bankrate)
May ‘19
4.250%
$7,000
$1,422,938
Mortgage News Daily
 
Today’s home buyers aren’t necessarily saving money each month because of the low interest rates, but they are able to borrow and pay more for the home they love. The low-interest rates convert to increased borrowing power which converts to higher sales prices.
 
Is this a benefit to Buyers or Sellers?
Both. Sellers get top dollar for their property. Buyers can compete better in the marketplace.  
 
What does this mean for you?
If you’re considering selling, this might be the best time to act. The low-interest rates plus the low housing supply mean you could earn top dollar. If you’re thinking about buying, know that these interest rates won’t stay around forever and when they arise, your borrowing power will decline.
 
In either event, if you’re thinking about a real estate move, please call me to discuss your options.
 

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For me success is knowing that each client is given the care and attention to feel confident in their sale. It is never losing sight that they have entrusted me to help them make a well-informed, financial decision.

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