Rates Have Risen – Why This Matters Little For Most Home Buyers.
by Evan Vanderwey on 06/04/10 at 2:16 pm
So mortgage rates have risen as expected – what does this mean for you?
Affordability
What does a 0.25% increase in the interest rate do to your mortgage payment?
On every $100,000 borrowed, a 1/4% increase in the mortgage rate will increase the payment by around $16 per month. 1/2% is a $32 per month increase; 1% is a $64 per month increase and so on.
On a $200,000 loan, a ¼% increase will affect your monthly payment by $32, ½% will increase it by $64, and so on.
Approvability
If based on your income you were qualified to purchase up to a maximum of a $200,000 home and all else remained the same (your income, property taxes, ins, down payment, closing costs, etc) and the interest rates went up by ½%:
You would then qualify for a $190,000 home instead of a $200,000 home. Make sure you read through this entire post, the relativity section will apply here.
Strategy
Frankly, you should not be buying a home because the rates are low. In fact, the rates relative to two years or ten years ago is an irrelevant factor in your decision. I suggest the following priorities when deciding whether to make a move up or to buy your first home. Consider the following questions:
1. Are you financially ready for this? If you have credit card debt that you don’t pay off each month and you have no emergency fund, you should consider taking care of those things before you enter the housing market. Getting into a home with your last dollar for the down payment is not a good way to start as a home owner. Water heaters cost $350. Furnaces cost $1500 or more. A new roof is $3000 if you do it yourself. Appliances are $500 each. Home warranties can offset some of this cost if you experience them in the first year, but after that the bill comes to you. These things will happen. You need to be ready in advance.
2. Can you afford the home you are purchasing? Lenders will still lend more than they should to most buyers in my opinion. A good test is to determine if you can make the payments on a 15 or 20 year loan before you write the offer. That way you have some cushion. You can always use the 30 year mortgage – but paying it down faster or having extra money to invest in a ROTH IRA or to buy your next car is a good idea.
3. Is the home a good deal? In Michigan right now, any home you buy will cost you less than if you purchased it three years ago. Still, work with a Realtor that can give you market data that will support your offer and take into consideration the condition of the home and make a list of the improvements you will need to take care of after closing. Add this up before you sign.
4. Did you notice I did not mention interest rates? Rates are a function of the total market and you cannot control them. You can control the answers to the above three questions. Be financially sound, purchase a home you can afford and make sure you don’t pay too much for the home. Then make sure you compare your rate to the market so that you know you are getting a fair rate and you will do well buying a home regardless of what the rates are.
Relativity
In reality, rising interest rates will apply downward pressure to the prices of homes – if rates rise you will likely pay less for the home than you would have had they stayed low. Slightly higher rates are good for you in the long run for this reason. Money, interest, income, prices, inflation, etc are all relative. You need not worry about them too much relative to each other. Remember that the low rates in 2003 were a huge contributor to rising home prices at that time. The reason the Fed has been trying to keep rates low is because it wanted to stimulate home prices and sales. It might make more sense to purchase a home during an unstimulated market than it did during the past 24 months.
The Point
Make good financial decisions for yourself personally based on your own personal economy and let the greater economy take care of (or not take care of) itself. Just because everyone is buying a home does not mean you are ready. But, if you are ready, now is a very good time to make this happen. The next few years will be a great time historically to purchase a home based on price per square foot of living area.
