Bottom Line Impact of Local Mortgage Interest Rate Shifts

If you begin a search for a new home by going online to check out the local listings, it’s likely that one of the first search criteria you enter will be the price range. After all, unless you are a virtual looky-loo who is just checking out how the other half lives, your budget will dictate which homes you seriously consider. If you are one of the more than two-thirds of us who will be counting on a loan to help finance that home purchase, the monthly payment amount is really what matters.

That’s why you don’t have to be a dedicated number-cruncher to be keenly interested in the direction local mortgage interest rates are going to head. In fact, if you aren’t one of those whose idea of a good time includes working out spreadsheet calculations, it probably came as a shock the first time you realized how big a deal it is when town mortgage interest rates notch up or down even a single percentage point. If you’ve never sat down to look at the numbers, please sit down before continuing…

For a quick example, suppose you were Average American Homebuyer taking advantage of an average American home purchase just this past July. Your family income was a bit higher than the median of $55,000—say, $60,000—so if you went with the lenders’ standard rule that 28% of income is the most a housing budget should allow, that meant $1,400 would be your maximum mortgage payment.

You found a terrific buy—a brand new home at exactly the median U.S. new home price, $286,000. You had saved up diligently, so the 20% down payment was available. That made enough of a dent in the sales price to qualify for the median mortgage interest rate, which was July’s 4.05%. Your annual taxes and bank-required insurance came to an annual $3,000, which added $250 a month). The whole situation made you more than median-ly happy, because it meant that your monthly mortgage payment on the home’s 30-year fixed rate mortgage came to only $1,350. That provides $50 of breathing room…

But remember, this quick example is one that required you to sit down. Sooooo — what’s the problem? It’s this talk about the Federal Reserve wanting to raise the federal funds target rate. That would have to trigger rises in the mortgage interest rates in town (and everywhere else). In our quick example, taxes and insurance costs stay the same; but suppose the mortgage interest rate notches up one little percentage point, to just 5.05%? That’s still below the historical average, yet the same home—and the same loan except for that one percent raise—now requires a monthly $1,486 payment. That crosses the budget recommendations—and although some lenders would likely consider other factors that might make the loan possible, that single percentage point rise does wind up costing Average American Homebuyer more than $1,630 a year (and nearly $50,000 over the life of the loan).

The reality is that prudent home shoppers are currently able to consider properties at higher price ranges than will be the case after mortgage interest rates rise. For them, the market is literally wider than it will become later.

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