Rates Going Up

Rates Going Up

We’ve all heard it a million times.  “Rates are going up…buy now!”  Most people are numb to that expression by now (pun intended).  So here’s a quick explanation about rates and why it may make sense to buy sooner rather than later:

 

Mortgage rates generally do better when the economy is worse.  That is because investors take their money out of stocks and put it into ‘safe’ investments such as bonds and mortgage backed securities.  Also, during this recent recession, the government (and pretty much the world economy) decided that lowering interest rates in general was the best way to stimulate the economy.  Consequently rates are at historical lows.  Recently the sentiment is that inflation may become an issue and the economy is getting better.  This could force the government (and likely the world economy) to RAISE rates – in general.  Remember they do not raise mortgage rates, but when all other interest rates go up, so do mortgage rates.  In fact, China was the first to raise its interest rates to fend off what they perceived as a possible inflation problem.  That hurt rates on a global scale.

 

More specific to our Real Estate market is Fannie Mae and Freddie Mac.  They recently implemented a ‘raising’ of interest rates – sort of.  Without going into too much detail, what they did was raise the cost of a loan which in turn leads to higher rates; even for 800 FICO clients!

 

So what does all that really mean for you besides “Rates are going up!  Buy Now!”?

 

First you need to understand how a mortgage qualification works.  When you qualify for a mortgage, you are NOT qualifying for a specific sales price or loan amount.  You are qualifying for a specific PAYMENT.  If rates go up then payments go up and you qualify for less home.  Period.

 

Rule of Thumb: For every half of a percent that rates go up, your buying power decreases by 5-6%.

 

Here’s an Example:

 

John Doe wants to buy a home at 250k and put down 20%, his loan amount would be $200k with a 30year loan repayment of $955 at 4% interest rate.  If rates crept to 4.5% then that same payment would only allow a $189k loan amount; which equals a $236k sales price.  He would have to find a home at $236k instead of $250k to have the same payment.  If rates went to 7% then he would only qualify for a $180k house!

 

So if you want to wait for the market to drop another 10% before buying, you better hope that rates don’t jump by more than 1% by the time you purchase.

 

CLICK HERE if you can’t view the graph below.  This is a graph of historical 30 year fixed mortgage rates.  Which direction do you think they will go?

I think so too. Give us a call to put a plan in place for your journey to buying a new home!