Interest Rates Affect On Home Cost

Rising Rates Affect the Cost Too

Mortgage rates have risen 0.5% in 2018 on 30-year and 15-year fixed rate mortgages and experts expect them to continue to increase. Buyers paying attention to the market understand the relationship that inventory has on pricing; when the supply is low, the price usually goes up. Rising interest rates can affect the cost of homes also.

When interest rates go up, fewer people can afford homes. Lower numbers of buyers can affect the demand, which could cause prices of homes to come down. The question is how much do the interest rates have to go up to affect demand?

As the rates gradually go up, the affect may not be noticeable at all except for the fact that the payments for the buyer have increased.

A ½% change in interest is approximately equal to a 5% change in price. A $300,000 mortgage at 4.5% for a 30-year term will have a $1,520.06 principal and interest payment. If the mortgage rate goes up 0.5%, it would affect the payment the same as if the price had gone up 5%. The difference in payments for the full term of the loan would be $32,547.

There are some things beyond buyers’ control, but indecision isn’t one of them. If they haven’t found the “right” home yet, it is understandable. However, when that home does present itself, the buyer needs to be ready to make a decision. If they are preapproved and have done their due diligence in the market, they should be able to contract before significant changes occur in the mortgage rates.

Mortgage Rates – A Historical Perspective

A Historical Perspective

In 1968, mortgage rates were 8.5%. The next year, rates went down to 7%. Homeowners could buy a 15-20% larger home for the same payments if they could find someone to assume their mortgage.

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FHA and VA mortgages were very popular in certain price ranges and they allowed anyone to assume the mortgage regardless of their credit. If you could find a person to take over your note, you were free to qualify for another mortgage.

In October 1981, mortgage rates reached 18.63%. A $250,000 mortgage had a monthly principal and interest payment of $3,896.46. As astronomical as that rate sounds, people were still buying homes and they were good investments.

Four years later, they were still over 12%. The monthly payment was $2,571.53. Believe it or not, people were excited to be paying only 2/3 what they had to pay a few years earlier.

Fast forward to late 1991 when the rates went below 9% and that same payment dropped to $2,015.16. At the turn of the 21st century, rates were 8.15% and that made the payment $1,860.62. Not much change in rates during that decade.

If we look around the housing bubble, late 2008, the rates were 6.04% and the payment was $1,505.31. By 2009, mortgage rates had fallen below 5%. The lowest mortgage rate was 3.31% in November 2012 with a payment of $1,096.27.

Rates fluctuated for the next few years until now, and most of the experts are expecting them to be above 5% by the end of 2018 producing a payment of $1,342.05.

The average mortgage rate for the past 47 years is a little over 8% ($1,834.41 on a $250,000 mortgage). The real estate and mortgage markets are cyclical. Rates have been historically low for a long period but will probably continue to rise. Most buyers don’t pay cash and mortgages enable them to purchase now. Based on history, even 8% would be an excellent rate. Until it reaches that point again, everything lower is a bargain.