By Aaron Chapman | SecurityNational Mortgage Company
A very common question from potential home buyers and residential real estate investors is, “Is now a good time to finance real estate given our current rate environment?” We have many in the lending industry who may have a hard time answering this question because the rates are significantly higher than their lowest points over the past few years. There could be a large portion of those in the lending industry that started there after the crash of 2008. The time following that experience has seen unusually low interest rates because of the quantitative easing put in place by the Federal Reserve. We saw this policy start changing in 2018 reversed in 2019 and then back to changing to what they referred to as quantitative tightening in 2022. That quantitative tightening has led to steep increases in interest rates in a rapid period of time.
Summarizing from sources such as Investopedia; Quantitative easing is a monetary policy tool used by central banks to stimulate the economy by buying government securities and other financial assets from banks and financial institutions what affected our interest rates most was the purchasing of mortgage-backed securities. This involves increasing the money supply in the economy by injecting new money into the financial system to lower interest rates and encourage lending and investment. This process is typically employed by central banks when traditional interest rate policies are ineffective, such as during times of economic recession.
Although the rates are higher now than what they had been since the onset of “Quantitative Easing” they are still lower than what the average has been since 1971. When reviewing the history of rates provided by Freddie Mac, we find that the average interest rate on a 30-year fixed for your average homeowner is 7.75% since 1971. When you’re looking at the history of those same rates from 1971 until the end of 2008 which is prior to the quantitative easing or injection of capital into the market from the central banks, you will find that the average interest rate for the average homeowner using a 30-year fix is 9.12%. Presently we are seeing lower rates than these for real estate investors looking to use conventional financing to purchase up to 10 finance properties with agency-backed financing.
Barring any enormous injection of capital from a source such as the central banks, I firmly believe that we will not see interest rates reach the point that we did during the period of quantitative easing from 2009 to 2022. Looking at the history of interest rates, it can be seen that we experienced over 40 years of decline. It is believed that it’s possible that we could see 40 years of increasing interest rates. If that is the case and we experience a continued increase in interest rates as a reverse of what we have experienced the interest rates today are the lowest that they will be for some time.
Having a long-term instrument like a 30-year loan, with a fixed interest rate can turn that instrument into a significant asset in a rising-rate environment. Additionally, since that rate is fixed for that entire period of time and we are operating within an inflationary environment that has continued to erode the dollar’s value consistently over the years one can find that they never even pay back the principal that they borrowed over that 30-year window because of the fact they’re paying it back with a declining instrument like the US dollar. That inflation has provided the need for increasing rents fairly consistently having the real estate investor continue to increase their income year over year while the bank or funding institution that loaned for 30 years receives the exact same dollar amount month over month but receiving actually less month over month because of the decline of the value of that which they are being paid back with.
Real estate investors can see double-digit increases in their cash flow while the banks themselves that put up the majority of the capital for their real estate investment business are seeing compounded declines in the value of their repayment period because of this fact alone having a fixed instrument for 30 years that a tenant is paying off makes this author believe that amortization of the loan itself as one of the greatest gains one can have as a real estate investor. Cash flow, tax benefits, and appreciation are big cherries on top of the Sundae. The predictable return is having somebody else pay off the lender with a declining instrument like the US dollar. Every dollar paid down is a dollar added to your return on investment.
DISCLAIMER: SecurityNational Mortgage Company, and its loan officers, unless individually licensed and specifically denoted in their credentials, are not qualified to, and are prohibited from representing themselves as accountants, attorneys, certified financial planners, estate planners, investment specialists, or tax experts, and will not advise you in those matters. Always seek the advice of a licensed professional. This article is for informational purposes only, contains the opinion of the author, not necessarily the opinion of SecurityNational Mortgage Company, and should not be construed as lending advice. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on the applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over the life of the loan. Reduction in payments may reflect longer loan terms. Terms of the loan may be subject to payment of points and fees by the applicant. Aaron Chapman, NMLS#267844, SecurityNational Mortgage Company Inc., Co. NMLS# 3116, AZ Banker# 0904315, Equal Housing Lender. Any amounts, figures, payments, or loan terms stated are based on continually changing markets, rates, loan programs, and borrower-specific qualifications, and are subject to change without notice. See loan officers featured for a personal consultation and accurate pricing.
