Interest Rates on Mortgages are Finally on the Rise.
But really? Is that such a big deal???
It can be. To over-simplify the impact:
– For every 0.5% the interest rate increases, your buying power decreases by 5%
In the first week of November, the average APR for a 30-year fixed mortgage was 3.47%. If you assume that you make $75,000 per year and have a 20% down-payment, a lender would qualify you for a monthly mortgage payment of $2,500.
At 3.47% and a monthly payment of $2,500, you would be qualified to purchase a home up to $559,000.
The current interest rate today is 4.03. At that interest rate, you now qualify for a maximum purchase price of $521,000.
With the blink of an eye, and a 0.5% change in the interest rate, your buying power dropped by $38,000.
If rates were to reach 4.5%, your new max allowable purchase price would be $493,000.
Crap! What can I do about this?
Well, I don’t have a crystal ball to let you know if interest rates will continue to go up. or if they will settle back into the 3.5% range. If you are in the market to buy a home, or are thinking about getting into the market soon, think about if waiting is worth risking the potential decreased purchasing power of higher interest rates.
If you are seller, you need to pay attention to this also. Homes values are tied to interest rates. Homes in the entry-level of the market (under $400,000), and homes that border on the jumbo loan limits ($650,000 – $700,000) are most susceptible to direct reductions in potential resale value when interest rates jump. When potential buyers are priced out of the market due to increased interest rates, the demand decreases, and therefore so does the fair market value of the homes currently for sale.