Interest rates effect on affordability

I read an article this morning from the National Association of Realtors website indicating that interest rates will start to rise in the second quarter. Here's an excerpt: "April 1 will be the first day that the Federal Reserve will end its debt purchase program and allow the struggling U.S. mortgage market to operate unassisted. As a result, the Fed believes mortgage rates will rise about three-quarters of a percent to about 6 percent, Boston Fed President Eric Rosengren said Saturday."

Not a huge increase but it got me thinking. Yes, this might be bad for the real estate industry but my gut reaction was "it's about time!" Rates have been so low for so long that it seems some take it for granted. I wholeheartedly understand that not everyone is in the place where they want to or can buy a home or investment property right now. It's the flippant "I'm not worried about it...rates aren't going anywhere" attitude that rubs me the wrong way. Maybe it's said because I'm a realtor and a debate seems fun...probably because they're not able to buy anyway. But if this is truly the attitude of potential buyers out there, the only thing that will make them see the proverbial light is for interest rates to climb. I can even see a little justification to these beliefs as interest rates have been low and haven't "gone anywhere" too high in quite a long time but all good things eventually come to an end.

I was curious what the 30 year mortgage rate trend has been but had a hard time finding a graph illustrating it so I made one up myself:

(to actually see the graph, right click on picture and click "open link in New tab")

Info. source:

http://www.freddiemac.com/pmms/pmms30.htm

What does this all mean, you ask? Rates play a significant role in affordability of homes. Let's take a principle and interest only payment of $1500 per month and see what price of house it will afford you based on a 7 point rate spread (5-11%) for a 30 year fixed rate mortgage.

5% interest rate = $279K home
6% interest rate = $250K home
7% interest rate = $225K home
8% interest rate = $204K home
9% interest rate = $186K home
10% interest rate = $170K home
11% interest rate = $158K home

These are basic figures taking only interest rate and payment into account. Taxes, insurance down payment, PMI, etc. have not been calculated as they can vary tremendously. See a mortgage professional for accurate figures based on your desired monthly payment or income.

Who knows what the future holds for interest rates and I realize that we probably won't see anything near the 11% mark for awhile but a low interest rate can make the difference between a comfortable mortgage payment and being house poor, which is the point I'm really trying to illustrate.

Let's look at it another way. If the median price for the area you would like to purchase is $210,527. Assuming a 5% down payment, here are the principle and interest only payments based on a $200,000 mortgage amount:

5% interest = $1074/mo.
6% interest = $1200/mo.
7% interest = $1330/mo.
8% interest = $1468/mo.
9% interest = $1609/mo.
10% interest = $1755/mo.
11% interest = $1905/mo.

Again, these are principle and interest only payments. Taxes, insurance, down payment, PMI, etc. have not been taken into account. Here is a link to a mortgage calculator to figure what your individual payment would amount to once you know a tax and insurance figure: mortgage calculator . You will still need the help of a mortgage advisor to figure PMI (private mortgage insurance) if your down payment is less than 20%. I also recommend asking for an estimate of closing costs.

There are plenty of reasons not to purchase a home as well (job instability, potential relocation, bad credit, etc.) but for many, now is a pretty awesome time to purchase. As the Greek say, "Carpe diem!"