Real estate rates are interest rates one has to pay for getting a loan to purchase a house or when you take a loan against your home.
Real estate is a favored source of investment; satisfying two of man’s cherished desires, one of economic prosperity and the other of owning land.
Most times real estate appreciates in value though some promising properties decline in value.
As markets fluctuate, net operating incomes decrease or increase in certain markets, as crime rate increases the value of properties also change. Such conditions are an everyday occurrence of a business and as an investor in real estate you would like to know the value of income producing properties.
Capitalization rate or cap rate as it is more commonly known is a ratio used to estimate the value of income-generating real estate. The cap rate is the net operating income divided by the sales price or net worth of a property expressed as a percentage. The cap rate is a reliable projection of worth of a property as it utilizes more of a property’s financial detail. The calculation of the cap rate includes a property’s selling price, total rents, non-rental income, vacancy amount and operating expenses, thus making the cap rate a reliable index of a property’s value. The cap rate is generally utilized by investors, finance lenders and appraisers to estimate the purchase price for different categories of income-producing properties.
A market cap rate = evaluating the financial data of similar properties (which have sold in the recent past in a specific market)
The cap rate may differ in various areas of a single city for different reasons such as location, level of crime, and general usability of an area. For investment properties like office space and retail outlets the worth of the property increases if the net operating incomes are increasing and cap rates decrease over a period of time. Conversely if the net operating incomes are decreasing and cap rates increase over a period of time, the net worth of the property declines. Market cap rates are important to check whether the asking price for a particular property is adequate or whether the property is over or under priced.
Commercial real estate rates differ from residential rates, mainly because they are used to finance commercial property, a commercial property being one that generates an income. The rates for commercial real estate tend to be higher as business lending is viewed as a risk. The rate of commercial real estate is gauged by the history of the business, risk of the commercial venture, but in general higher the risk higher the rate. Commercial real estate loans have either fixed or adjustable rates and attract penalties for prepayment. The prevailing national rates for a 30-year fixed is 5.66%, 15-year fixed is 5.33% and 5/1 adjustable is 5.59%.
Commercial real estate rates should be gauged on one, whether the current rate offers economic value for the purchase and secondly whether the current rates offer better economic value to the investor’s current real estate.
Real estate loans are of two types residential and commercial real estate loans and both attract different type of loan rates.
Real estate loan rates are fixed (meaning the rate does not change during the term of the loan) or variable/adjustable (meaning the rates fluctuate according to market conditions).
30-year fixed rate loans are quite popular as monthly payments are less, while the fixed rate provides stability over the loan term. An FHA 30-year fixed loan carries a rate of 6%.
A 15-year fixed rate loan carries a lower rate of 5.44%, which results in lower interest payments but the principal and monthly payments increase.
The adjustable rate mortgage (ARM’s) offer lower initial rates than fixed loans. After the first year rates increase depending upon market conditions.
Most ARM’s include a cap on rate increase in any given year as well as for the term of the loan. Some ARM’s offer initial rates well below 2% of fixed rates and limit increase in rate by 1% yearly and 5% to 6% over the loan term.
The rates on a loan can be reduced by points, which are interest paid in advance. One point is equal to 1% of the loan amount. The accepted rule is that 1 point is worth 1/8 of 1% off the loan rate.
Some loan rates in today’s markets are:
Real estate commission is usually borne by the seller for the services of the listing agent and buyer’s agent. The commission is equally divided between the two agents upon successful closing of the sale.
Real estate commission rates traditionally average around 6%-7% of the gross sales price of the property. Commission rates are not pre-set by any government agency nor can commission rates be fixed. Real estate commission rates are negotiable by law and one can always negotiate for a favorable commission rate as a difference of one percent can result in savings of hundreds of dollars.
For example a sales price of $80,000 and a commission rate of 5% yield the agent a $4000 commission.
A commission rate of 6% on a sales price of $80,000, gives the agent a $4800 commission. A commission rate of 7% on a sales price of $80,000 ups the agent’s commission to $5600. So it is in the seller’s interest to always negotiate for a favorable commission rate. One can reduce commission rates if the property is in a good condition, can sell faster, evinces greater buyer interest. One can also utilize the services of discount brokers who charge 3% commission only.
When you avail of a mortgage to buy a home, the lender charges you an interest rate; this is the rate the lender charges the borrower for using his money. The interest rate also determines your monthly payments, generally higher the interest rate, higher will be your monthly payments. Interest is also called the cost of money.
Interest rates are an amazingly powerful and essential part of a real estate investment. Lower interest rates results in lower cap rates and opens the door for other economic benefits such as reduced mortgage payments and to purchase bigger property.
Increase in interest rates results in increased monthly payments, liquidity in the real estate market goes down which results in reduced investment in real estate.
Real estate interest rates are calculated according to the loan amortization table. There are three types of the loan amortization table namely the Equal Capital, Spitzer amortization table and the Bolit amortization table.
Real estate’s inflationary prices have resulted in brokers earning more on one deal than what most people earn in a year. With the advent of the Internet and consumers becoming savvier, and perforce the increasing cost of living, there is a need to save on the thousands of dollars realtors charge. In this space steps in the flat-rate broker, who charge a fraction of what traditional brokers charge. Their services are usually no sale no charge, and for a meager 3% of the total sale price include commission, local newspaper advertising, net exposure and full access to their database. It is essentially a fee for service where you can also pick and choose the service you want.
For instance MLS flat fee, you pay a small amount to list your home. If the home sells via the MLS you pay 2-3% instead of the 6% that traditional brokers charge. This service is also no sale no charge. Flat fee MLS provides all services such as open houses, internet and newspaper exposure and color feature sheets.
Flat rate brokers are licensed real estate professionals.
Flat rate real estate is fast gaining popularity as an alternative and cost saving way of either buying or selling your house.