How Increasing Interest Rates Affect Monthly Payments
What Interest Rate Increases do to the Home Loan Value You Can Afford
Life has been extremely busy in the mortgage industry these past few months. People waiting for the bottom of the interest rate market probably have missed the mark as rates moved up rapidly late last month. Rates are driven by the sale of Mortgage Backed Securities on the open market, and continue to be very volatile in nature.
From a historical standpoint, rates are still extremely low. If past performance is any indicator, we could be in for a swing in a much higher direction. If you purchased a home in 1981 for example, you paid 16% interest for a 30 year fixed. At that point in U.S. history, the country's inflation rate was running in double digits and the cost of borrowing money reflected this fact.
Our current mortgage rates have actually stayed artificially low, as our government has bought its own debt. These low interest rates can change very rapidly, as we watched in November when there was a swing of .5% in a matter of a week. This rapid change is indicative of the way rates will move these days, as investors know the volatility of our economy and our debt. In simple terms, no one wants to be the last one holding on to an investment at 4.75% when the market swings to 8%-10%+.
Just a one percent change in interest rates makes a big difference in what you can afford.
With a 30 year mortgage on a $350,000 home at 5%, your principle and interest payment will be $1878. The same home at a 6% rate will have a principle and interest payment of $2098 per month, and again the exact same home at an 8% rate will have a principle and interest payment of $2568 per month.
Let's look at the flip side of monthly payments. If rates move to 6%, that same $1878 monthly payment will only allow you to qualify for a $313,000 home. Rates tend to move up much faster than income.
Today’s market gives you the most historical buying power considering current rates and prices of homes. If you are thinking of buying or building a home, this is the time to do it. Housing prices have stabilized in most markets. This means the bottom of the market is here. Grab your best deals because there is nowhere but up from here.
Source: Rate history HSHAssociates.com. Payment amounts reflect principle and interest only.
Call Brian at 919-256-3133 for more information about loan qualifications and monthly payments at different interest rates.
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Sr. Loan Officer, Primary Residential Mortgage
701 Exposition Place, Suite 118, Raleigh, North Carolina 27615