How Mortgage Rates Impact Your Home Buying Power

    As the economy continues to show signs of recovery, consumers get to enjoy plenty of benefits – better job security and rising home values to name two.  We should also prepare for rising interest rates.

    In 2013, 30-year fixed mortgage rates rose well over 1% for the year, from 3.34% to 4.53% according to Freddie Mac.  According to most experts we should prepare ourselves for another year of the same in 2014, as most predictions are that mortgage rates will creep into the 5% range later in the year.

    The expectation is largely that long-term rates such as mortgages and Treasury notes will rise through 2014 as the Feds scale back its bond-buying program known as Quantitative Easing.  This will in turn place downward pressure on long-term rates.  As a result, affordability in the housing market will be impacted.

    What does this mean specifically for homebuyers in 2014?
    If your plans include buying a home sometime this year, it’s better to do so sooner than later.

    The table below shows the impact that higher interest rates have on a buyer’s affordability.

    Loan Amount

    Interest Rate

    Mortgage Payment

    $200,000

    3.5%

    $898

    $200,000

    4%

    $955

    $200,000

    4.5%

    $1013

    $200,000

    5%

    $1074

    $200,000

    5.5%

    $1136

     

    The payment increase for every half a percent is approximately $60 per month.  If rates continue to rise at the same pace they did in 2013 (increasing more than 1 percent), using the example above, that means a loss of $21,500 in purchasing power.  In other words, to have the same payment you would’ve had when rates were 1% lower, you’d have to either put down an additional $21,589 or you’d have to buy a home that costs $21,589 less.

    Furthermore home prices are expected to continue to rise in 2014.  Higher rates and higher home prices mean affordability will go down, buying power will be reduced and ultimately buying less home.

    So what will rates do and when?  What will happen with home prices?  Do I have enough money saved for down payment?  How much home can I afford?  While it’s never wise to rush into buying a home without giving it careful consideration, don’t allow too many unknown variables to keep you from making your decision.

    If you’re thinking about buying a home in the near future, it’s going to be cheaper to do so sooner rather than later.

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    Here are a few additional facts to consider:

    • Regardless of rates being on the rise, they’re still at historic lows.
    • The increase in home prices isn’t all bad because it will mean less investors.  Less investors translates to additional inventory.
    • Buying now while rates are still at historically low levels means more principle being applied each month.  More principle being applied means building equity in your home quicker.  For most folks, more equity means a better night’s sleep!

    Low home prices, still-low interest rates, along with the tax benefits of mortgage interest deduction continue to make buying a home a great long-term investment.

    Guest article written by…
    Craig Berry
    Atlanta Mortgage Pro

     

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