By now, you've probably noticed a strange thing at your local gas station - prices have been dropping steadily. After five years of steadily rising gas prices, this should come as a relief, but it can be even better than that. Lower gas prices could actually help you buy a home.
As a matter of fact, lower gas prices can help you buy a home in two ways: by adding to your down payment savings, and by playing an important role in keeping mortgage rates low. There is just one catch: anyone who hesitates to act on this opportunity may miss it all together.
What's Up (or Down) with Gas Prices?
First, what is going on with gas prices? It's well known that oil is a limited resource, and that global population and economic growth mean rising consumption. The two of these should translate to higher prices, but the cost of a barrel of oil has dropped by about 40 percent since late June.
There are two primary reasons for this. One is that while the US economy seems to be gaining momentum, the global economy has slumped, causing oil consumption to dip. The second is thatfracking has increased US production of oil enough to tilt the global supply/demand balance.
These two trends add up to falling oil prices, but don't get too used to them. The global economy is cyclical, but on an upward trajectory over the long haul, so expect rising demand for oil to continue to be an issue in the years to come. As for fracking, it is a more expensive way of getting oil out of the ground than conventional drilling. If oil falls much further, the price will drop below what it costs to produce oil by fracking, so some of that capacity will be sidelined till prices rise again.
The bottom line is that the history of oil prices is one of great volatility. Large declines in price can easily be followed by sudden spikes.
In the meantime though, enjoy those lower gas prices - but put them to good use.
Gas Savings Can Pump Up Your Down Payment
One way that lower gasoline prices can help you buy a home is by accelerating your down payment savings. According to the US Energy Information Administration, by mid-December the retail price of a gallon of gas had fallen by about a dollar since last spring. To a family consuming 20 gallons of gas a week, this would translate to annual savings of $1,000.
At a time when three percent mortgage down payments are making a comeback, that $1,000 could represent a healthy chunk of what you put down on a house. For example, three percent of a $150,000 purchase is $4,500. It might take a long time for gasoline savings alone to get you there, but in conjunction with other savings, the lower prices at the pump can certainly help you get there faster.
Lower Gas Prices Keep Mortgage Rates Down
Beyond helping you save for a down payment, lower gas prices help reduce the cost of borrowing to buy a home.
According to the Bureau of Labor Statistics, the gasoline component of the Consumer Price Index declined by five percent for the 12 months ending in October. This was an important factor in keeping overall inflation to just 1.7 percent over the same time period.
Figures from mortgage finance company Freddie Mac show that 30-year mortgage rates spent most of the fourth quarter of 2014 below four percent. If inflation were at a more normal level of three to four percent, you could expect mortgage rates to be proportionately higher. As long as inflation stays low though, mortgage rates can stay low.
How to Make the Most of this Trend
If you want to act on this opportunity, take the following steps:
- Add a special "gas bonus" to your down payment savings. Don't simply fritter away what you are saving at the gas pump. Figure out how much of your weekly budget you are saving due to lower gas prices, and add that to your down payment contributions.
- Look for additional gas savings. Looking at the role gasoline expenditures play in your budget could prompt you to look for other ways to cut down on driving or otherwise conserve gasoline. After all, lower gas prices won't be around forever, but conservation measures could continue to save you money.
- Get your application materials lined up. Like gasoline prices, mortgage rates can be very volatile, so you want to be ready to act on low rates as soon as possible. Start reviewing your credit report and getting your financial documentation together, so you can streamline the mortgage application process once your down payment nears critical mass.
If you've been driving for a few years, you know these occasional dips in gasoline prices come and go. For once though, you can make this one have a more lasting impact by using it to secure a home and a low mortgage rate that you will enjoy for many years.