Here’s a quick read from one of our Preferred Lenders Ian Macdonald on Interest Rates.
Lately, I have been asked about the impact of interest rates on the affordability in the housing market. While rates have certainly fluctuated to higher levels over the last year they have come down since the beginning of March and from a historical perspective, interest rates are still very low. In fact, rates are about the same right now as they were in the beginning of 2017. So, let’s look at how rates affect a person’s purchasing power and the affordability of a home…
Let’s use a $250,000 loan for our example (not factoring in the cost of taxes and insurance):
- $250,000 at 4% rate for 30 years = $1193
- $250,000 at 4.5% rate for 30 years = $1266 (+$73 difference)
- $250,000 at 5% rate for 30 years = $1342 (+$149 difference)
This gives us the good rule of thumb that for every .5% in rate the borrower will pay $75 more a month on a $250,000 loan.
Let’s look at this the other way. How much does an increase in rate affect the consumer’s purchasing power? Let’s say that same borrower who could budget for $1193 a month on a $250,000 loan at 4% has rates rise .5% while they are shopping. To stay at the same amount per month of $1193 at a rate of 4.5% that would reduce the loan down to $235,451. For that same borrower to stick with their original budget they would have to either put down $15k more or find a house that costs $15k. You can see how for every .5% increase in rate the customer’s purchasing power was reduced by about $15,000.
What about if rates went up .5% and home values went up 5%? How would that affect the home’s cost?
Let’s take that $250k loan at 4% and up it 5% on amount to $262,500 and up it .5% on rate to 4.5%. That $1193 payment would go to $1330. That’s an 11.5% increase in the cost due to the compound effect. I think that’s substantial.
Interest rates are probably going to stay around the 4.5% mark on 30 yr. fixed for the remainder of the year. I do not think we are in danger of rates over 5%, but do any of us really know? The important thing for your clients to understand is the cost of waiting or walking away from a plan over a minor difference in sales price.