What does 1% mean to you over 30 years when it comes to making mortgage payments? Well, that depends on if you are a buyer or a seller using financing to buy or sell your house. If you are a cash buyer you don't worry about 1% because as the old saying goes, "Cash is King."
Fannie Mae's Chief Economist Doug Duncan said, "With regard to housing, all eyes now are turned toward the Federal Reserve, which is expected to begin scaling back its asset purchase program this week. Mortgage rates have increased more than 100 basis points since early May, and we anticipate that trend to continue, albeit gradually, during the next year."
Looking at Duncan's comments in March 2012, "Conditions are coming together to encourage people to want to buy homes," said Doug Duncan, vice president and chief economist of Fannie Mae. "Americans' rental price expectations for the next year continue to rise, reaching their record high level for our survey this month. With an increasing share of consumers expecting higher mortgage rates and home prices over the next 12 months, some may feel that renting is becoming more costly and that home ownership is a more compelling housing choice." Hindsight is 20/20. Some people are kicking themselves for not buying when interest rates & home prices were lower. So looking at what is trending right now, it is financially compelling to move now instead of waiting until spring.
Douncan's comments tells me that it shouldn't be a surprise if interest rates go up at least another percent by spring. And that could leave buyers and sellers less than excited. So what does that mean for buyers and sellers?
Let's start with Buyers:
What Do Rising Interest Rates Mean for Buyers?
For buyers who are financing a home:
rising interest rates means that a buyer is paying more interest each month for the same priced house at a lower interest rate. Plain and simple. Let's look at two home prices. One home is purchased for $150,000 and the other is purchased for $250,000.
A purchase price of $150,000 at today's fixed interest rate of 4.25%,(with conventional financing & 5% down payment) would give you a principle and interest monthly mortgage payment of $701.01 *
The same purchase price of $150,000 at 5.25% = p&i $786.89*
The same purchase price of $150,000 at 6.25% = p&i $877.40*
(*remember that you will also have homeowners insurance, property taxes and mortgage insurance added to that monthly payment. - this mortgage payment example is principle and interest based on a conventional 30 year loan.)
The difference in one percent is substantial. Your monthly payment from 4.25% to 5.25% is $85.88/month. When the interest rate rises back to 6.25% add another $90.51/month to the 5.25% monthly payment. As the mortgage interest rate rises, the less purchasing power a buyer has.
If you look at the amortization totals over 30 years, 1% is substantial - let's look at side by side comparisons of 4.25%, 5.25% and 6.25% interest rates to show you the long term financial difference to buyers:
Monthly payment (p&i) $701.01 $786.89 $877.40
Loan amount $142,500 $142,500 $142,500
Interest rate 4.250% 5.25% 6.25%
Term 360 months 360 months 360 months
Total of payments $252,366.80 $283,280.67 $315,860.82
Total interest paid $109,866.80 $140,780.67 $173,360.82
A purchase price of $250,000 at today's fixed interest rate of 4.25%, would give you a principle and interest monthly mortgage payment of $1168.36
The same purchase price of $250,000 at 5.25% = $1311.48
The same purchase price of $250,000 at 6.25% = $1462.33
(***remember that you will have homeowners insurance, property taxes and mortgage insurance added to that monthly payment. - this mortgage payment example is principle and interest based on a conventional 30 year loan.)
Monthly payment (p&i) $1168.36 $1311.48 $1462.33
Loan amount $237,500 $237,500 $237,500
Interest rate 4.25% 5.25% 6.25%
Term 360 months 360 months 360 months
Total of payments $420,607.78 $472,135.93 $526,437.19
Total interest paid $183,107.78 $234,635.93 $288,937.19
Again the difference in one percent is substantial. Your monthly payment from 4.25% to 5.25% is $143.12/month. When the interest rate rises back to 6.25% add another $150.85/month to the 5.25% monthly payment. As the mortgage interest rate rises, the less purchasing power a buyer has.
Granted, not all home buyers stay in their home until their 30 year loan is paid off, but when you look at the long term differences in 1% or 2%, a qualified buyer should be motivated to move forward and not wait.
What Do Rising Interest Rates Mean for Sellers?
It means fewer buyers qualified to purchase your home.
As interest rates rise, the less purchasing power buyers have. The rise in rates will reduce the number of qualified buyers available to purchase your home. Also, some buyers may not want to pay more in a monthly payment (because of a higher interest rate) and therefore put in a lower offer to compensate for that higher interest rate.
Take Home #1 above for example: Looking at a $150,000 home at 4.25% over 30 years a buyer's principle and interest payment is $701.01/month and when it increases $85.88 a month at the first 1% increase to a Principle and Interest payment of $786.89 a month you will have knocked some buyers out of the running to purchase your property. And when mortgage rates rise an additional 1% to 6.25% add another $90.51/mo to the payment of $786.89 to $877.40 and more buyers will fall away. Granted the rates don't typically jump 1% over night, this year rates jumped 1% from April to August. More typically looking at a 30 year average of when rates rise, they go up .25 within a 3 month period.
Nick Timiraos, a real estate news and analysis blogger from The Wall Street Journal, said on September 20, 2013, "Home prices are also higher than they were a few months ago - meaning sellers may have lost the advantage they had on prices earlier this spring. Since many buyers who need a mortgage shop for a house based on how much they're going to pay every month, the increase in rates together with the increase in prices could lead to some sticker shock."
Where do we go from here?
We are still at interest rates that are historically low. And for many people who are a few years out from buying a property that can be of some consolation. Get yourself prepared while you wait. Build up a great nest egg, make sure your credit is clean, pay down your debts and the more money you can have for your down payment the better. And by all means please talk with a credible lender and a licensed REALTOR®. According to the National Association of Realtors®, "Existing-home sales increased in August and reached the highest level in six-and-a-half years, while the median price shows nine consecutive months of double-digit year-over-year increases."
This is great news for sellers -IF you are in the market to sell your home NOW. The market can change and the "wait until Spring" approach to list your house might cause sellers to lose their financial edge. And for buyers, they can wait and see if prices and interest rates come down, but that approach might cost buyers a bigger home or more money for the same property that is available today.
If you or someone you know are in the market to buy or sell a property in MN- contact me today! I'm happy to help.
Make it a great day!
Liz Lewis Sandwick grew up in Duluth, is married to her husband Robb, has three kids: Caroline (5) Cooper (3), and Max (1) and would love to help you find your next home!