Interest Rate at Six-month high
HOW RISING RATES CAN AFFECT YOUR BUYING POWER
If you’re still undecided as to whether now is the right time to buy your dream home, consider today’s continued low interest rate environment. These rates mean lower monthly payments, which may help you make this important decision.
Consider this: Many people assume that a lower sales price will automatically mean lower monthly payments. You may be surprised to learn that mathematically, affordability is more closely tied to fluctuations in mortgage interest rate than price – especially when interest rates are rising.
Here’s how it works: If you’re going to finance a home, you’ll be approved for a certain maximum loan amount, which will determine just how much house you can afford. However, since that loan amount is based on prevailing interest rates, when interest rates rise, your loan amount – and buying power – goes down.
Here is a sample using arbitrary figures for this example only:
Using a $300,000 purchase price, and a $30,000 down payment, your monthly loan payment with an interest rate of 3.7 percent would be $1,242.76. If you wait until mortgage interest rates rise to 4.5 percent, that same house or condo will cost you $1,368.05 a month. That’s a difference of $125 each and every month!
If your purchase price is $600,000, with $60,000 down, the same increase in interest rate will cost an additional $250 a month. Of course, when the rate exceeds 4.5 percent, the increase in monthly payments will be even greater.
“Rising interest rates can increase your monthly payment if you wait,” says Jeff Bamer, Vice President of Investor Management Department at First Hawaiian Bank.
Keep in mind, a mortgage payment often includes more than the payment of the principal. Additionally, the amount you pay includes interest and may also include taxes and insurances. All but one of those costs are relatively stable. It is the interest rate that can fluctuate, and when it does, it can have a tremendous impact on your monthly payment.
Mortgage interest rates have been at historic lows for so long now they are taken for granted. But the recent increase to six-month highs raise the question – have we seen the bottom?
“Mortgage rates have been steadily decreasing ever since 2008 when rates were around 6 percent,” says Bamer. “They have come down as the U.S. and global economies have struggled over the past few years. Mortgage rates were driven down even further by U.S. Federal government measures to lower them in an effort to help the struggling housing market and economy recover.”
A look back to 2000 shows the average 30-year fixed rate was approximately 8 percent, more than twice today’s average rate. Then, after the third-quarter stock market crash in 2008, mortgage interest rates dropped to below 7 percent. The Federal Housing & Economic Recovery Act, aimed at keeping mortgage interest rates down by purchasing mortgage-backed securities, brought rates down further. In 2009 they dropped below 6 percent, and in 2010, they dropped below 5 percent. But even after federal intervention ended in mid-2010, interest rates dropped again to sub-4 percent levels. According to Bamer, we likely have now seen the absolute bottom. As the economy continues to improve, rates will rise.
“Rates have been trending upward in 2013,” he says. “This is partly due to signs that the economy is starting to strengthen. Also, fears that the Fed will discontinue their mortgage rate intervention as the economy rebounds has had an effect. The improving national housing market has probably been the biggest factor in pushing mortgage rates up.”
February’s 30-year fixed rate, according to Freddie Mac, reached 3.53 percent, the highest it has been since August when the 30-year rate averaged 3.60.
Bamer’s advice is don’t wait. “Getting a fixed rate mortgage now, while rates are near these all-time historic lows, could save your family money for years to come,” he concludes.
$300,000 purchase price
$30,000 down payment
$270,000 loan amount
@ 3.7%: my monthly payment is $1,242.62
@ 4.5%: my monthly payment is $1,368.05