Mortgage Rates Are Increasing... What it Means for You
If you've been considering purchasing a new home or upgrading, you need to read this. If you are planning on purchasing your new home with cash, then there is no need to worry, but if you're going to be financing part or all of your home, you will want to consider how rising mortgage rates affect your purchasing power.
Fed raises rates and favors additional rate hikes
The Fed recently raised the main rate from 2.00% to 2.25%. This is the third time this year that the Fed has raised its benchmark interest rate. What's more, 12 out of 16 officials are said to favor 4 rate hikes in 2018 which means another rate hike by the end of the year is more than likely. Keep in mind that the Fed's main rate is not directly tied to mortgage rates, but it can and does affect them.
How the Fed's interest rate affects your mortgage rate
The Fed's rate affects short-term and variable interest rates that banks use to lend money back and forth to each other in order to have enough money on reserve to stay in federal compliance. In short, this means that it becomes more expensive for banks to do business. As with any business, this rising cost is passed onto customers in several ways such as higher rates on credit cards, auto loans and to a lesser extent.. yep, you guessed it, mortgage rates. This isn't the only factor when it comes to mortgage rate pricing, but it will typically correlate to a rise in rates.
How Rising Mortgage Rates Will Affect You as a Buyer
Monthly Payment & Total Loan Cost
The most glaring effect rising mortgage rates have on you as a buyer will be seen in your payment. As you can see in this mortgage rate graphic, in the past 52 week period a 30 year fixed rate mortgage has been as low as 3.93% and as high as 5.02%, with today's rate being 4.97%. Let's examine what the difference in payment (principal + interest) would be on a typical $450,000 loan. At 4.00% your payment would be $2,148.37 with a total loan cost of $773,412.78. Now let's examine the same loan at 5.00%. At 5.00%, today's rate (4.97%), your payment would be $2,415.70 with a total loan cost of $869,651.03. That's a payment difference of $267.33 and the home will cost you an extra $96,238.25. That's almost $100,000 more! So as you can see rising rates can really affect your payment and overall cost of the home.
|Total Loan Amount||$773,412.78||$869,651.03|
Home Purchasing Power
It can also affect your purchasing power if you are trying to keep your payment at a certain amount. For instance, let's assume you wanted to keep your payment (principal + interest) at $2,500 per month. At 4.00% that payment would allow you to get a loan of $523,000. At 5.00% that payment would allow you to get a loan of approximately $465,000. Let's look at that same payment with a rate of 5.50% and finally at 6.00%. With an interest rate of 5.50%, a $2,500 payment will amount to a loan of approx. $440,000. At 6.00%, your loan amount would be approx. $417,000. If you are planning on purchasing your new home with cash, then there is no need to worry, but if you're going to be financing part or all of your home, you will want to consider how rising mortgage rates affect your purchasing power.
With the economy continuing to grow, it is expected that rates will continue to rise. If you are in the market to purchase a home, you'll want to consider the savings involved with buying sooner rather than later. If there is anything I can do to help you in your search such as narrowing down your search criteria, making changes to your updates, or simply discussing your options, please give me a call at (909) 730-3168 or shoot me a quick email at Barbara@homesbybarbara.com. You can also contact me by filling out our contact form with your questions and the best time to contact you.