Interest Rates and the Cost of Your Home

While most individuals are focused on the fluctuation in current housing prices, many are failing to recognize the large role interest rates play in the monthly, yearly and overall cost of their real estate purchase.

Although interest rates have been increasing lately, they are still near historic lows in the United States.   The average 30 year mortgage interest rate had a very slight increase to 4.60 percent the week ending August 6, from 4.58 percent last week. Last year at this time, the average was 3.76 percent.  This presents a significant opportunity for those looking to purchase a primary residence or investment property.  It is hard for me to imagine that my husband and I bought our first home in 1984 at an interest rate of 13.25 percent!

While qualifying is currently much harder than it has been in previous years, those with adequate credit and income are having no problems.  The chart below shows several different purchase prices and their corresponding monthly payments at different interest rates.  Small differences in the rate can make and a large difference in the monthly payment and an extremely large difference over the life of the loan.

While most buyers are very concerned that the housing market will drop several additional percentage points, a raise in interest rates could cause them to pay significantly more.  For example, let’s assume a buyer purchases a $300,000 home and puts 10% down.  If their loan was currently at 4.5% and fixed for 30 years, their monthly principal and interest payment would be $1,368.  If rates escalated to 5.5% their monthly payment would raise to $1,553.  They would be paying an additional $185 a month and $2,200 in interest every year.  Over the life of the loan that would be an additional $66,000 in mortgage interest.  Housing prices would have to drop an additional 10% to equal the same principal and interest cash output over the life of the loan caused by just a 1% rise in interest rates.

Mortgage rates are just one of many items to consider when making a real estate purchase, but it is amazing to see the large scale effect they will have on the overall cost of the property. While there is no crystal ball to predict the future, it is very likely that rates will rise and home prices will flatten out and eventually rise.

Source:

Jake Rasmuson, Coldwell Banker – LeeAnn Rasmuson & Associates, Agent and friend 🙂