When (not if) Interest Rates Rise.

I’ve spent time over the past couple of years cautioning my clients that interest rates will rise someday – and that they want to buy before they do.

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The Fed wants to raise rates, they need to in order to fund the government’s expenditures. We (most real estate agents, lenders, economists, etc) thought this would happen sooner. So, we we’ve all been wrong about the when, but we aren’t wrong about the why. Now, the Fed is making it fairly clear that we’ll see the rise soon. Maybe at years end -http://money.cnn.com/2016/11/02/news/economy/federal-reserve-november-meeting/index.html

So, here’s why this matters – and let’s look at it two simple ways. For both scenarios, let’s assume a conventional loan, 20% down, standard taxes, and insurance. If you are getting a VA or FHA loan, or putting more or less down – the concept remains the same, but the numbers will change.

A. You want to shop for a home with a price –  let’s say $400,000.
If Rates are 3.5% – your mortgage payment will be approximately $1837 per month.
If Rates are 4.0% – your mortgage payment will be approximately $1928 per month.
That’s a difference of:
$91 a month
$1,092 a year
$32,760 over the life of the loan.
That’s how much more you are paying JUST for the loan. None of that money goes towards paying down your home’s purchase price.

B. You want to shop for a home on a budget – let’s say $1837 a month.
If Rates are 3.5% – the most expensive home you can afford is $400,000
If Rates are 4.0% – the most expensive home you can afford is $381,000
That’s a difference of $19,000 in home value – in terms of what you’d find in value, we’re probably talking about a concession such as:
– the size of yard
– a garage
– updated kitchen
– neighborhood, etc.

In short – Interest Rates matter – and could even make it so somebody who could buy one day, literally couldn’t the next. More commonly though, it will make it so somebody is just paying more for their loan than they would have when rates were lower, or make somebody need to lower their standards on the home they buy.

I’ll contend, as will most agents, that rates anywhere around at or below 5.5 or 6 are historically “good,” but with prices where they are in our market, the only place we can hope to get a deal right now is on the loan, so I’ll continue to urge those who’ll listen to act before the rates go up.

As always – contact me with any questions, anytime. – Gavin Gregory 206.395.6266 gavingregory@gmail.com http://www.gavingregory.com