Or should I ask, “Is there anyone who thinks they will not go up”? The bankers and economists who have the ear of the media are giving a high probability that the Feds will raise the rate by a quarter percent later this month. When they do, long-term mortgage rates will increase that amount or more. A quarter percent doesn’t sound like much,---but this will be the second one of those in 12 months, and only two more will make one whole percent. So, for our consideration here is how rising mortgage rates will affect buyers and sellers of real estate.
Everyone knows that when rates go up, the mortgage payment goes up, but most don’t know how much it goes up with each incremental rise and how much this affects affordability. To illustrate the impact, let’s consider the average buyer getting a $200,000 thirty year conventional loan. The monthly payment will consist of taxes, insurance, plus the mortgage loan payment which consists both of principal and interest. This entire payment is commonly referred to as PITI. The principal and interest of this loan at 4% is $955. At 5%, it is $1074. That’s $119 more per month or $1426 per year for the 1% increase.
The total first-year loan payment of $11,458 is divided as $7936 for interest and $3522 in principal reduction. At a 5% interest rate, the payment is $12,883 annually with $9933 going to interest and $2951 to principal. This example clearly shows that along with the lower interest rate and the lower payment, your loan balance is also reduced at a faster rate. The main point is to recognize the noteworthy benefit one gets with the lower rate. It is also important to note that the gross monthly income requirement for a conventional loan at 5% is $425 higher than at the 4% loan.
This is one scenario intended to illustrate the downside of delaying a purchase until rates are higher. A good loan officer will factor in other considerations specific to your situation, like credit scores, and will give you a personalized comparison. Your Realtor can recommend a knowledgeable lender for you.
Acknowledging the substantial cost associated with delaying until a higher rate arrives, buyers should strive to tie up a loan at the low rate before the end of the year, with a second best target being before Easter next year when the seasonal buying activity picks up.
For sellers, higher interest rates also result in more days on the market for properties to sell, since the number of buyers decreases. Inventory levels of competing properties will increase. This would suggest that if you need to sell a property next year, it would be beneficial to sell sooner, than later when rates are higher.
In either case, a good Realtor would be happy to look at your needs and assist you with making the most effective and satisfying choices.