Over the past few months there has been a lot of talk regarding interest rates and if they will increase over the 2nd half of 2017. This has been a hot topic, being we have already seen an increase in the first quarter of 2017. The Feds have stated that they do plan to implement further increases and is likely to happen. This along with taking into consideration interest rates have remained extremely low for a long time, the only direction expected is up. With the overall strengthening of the economy and the steady gains in the market, it is typical for interest rates to follow suit. The market is always changing but we can plan and adjust along with it to be ready.
A few things you can do to help your purchase power:
- Keep an eye on your credit score as this has an affect on your interest rate.
- Keep an eye on your debt to income ratio.
- Build up your down payment. As this will give you more buying power.
- Mortgage borrowers also have the option many times to buy down their interest rate, if affordable and attractive enough to do so.
“The average interest rate on a mortgage is currently about 4.3 percent, the average loan on a 30-year, fixed-rate mortgage is worth about $237,000. If the borrowing rate were to climb by say, another percentage point in the coming year, this could mean an additional $138 a month on the average mortgage payment”.
It is common that rising interest rates follow with a growing economy. However the increase in the economy or an individual’s income may not always be in line with the rise of interest rates. If rates are increasing faster than the overall economy itself, it can then start to slow down demand within the market. Per Zillow Chief Economist – Svenja Gudell “When you combine higher mortgage rates with increasing home values, mortgage affordability starts to suffer, and buyers will have to spend more and more on their monthly payments.”
As money gets more expensive to borrow the demand to borrow that same amount can lessen and can also make those funds less attainable to buyers then if at a lower interest rate. From the New York Times: “When mortgage rates go up, people are a little less likely to buy a house, and those with fixed-rate mortgages are less likely to refinance (because they probably will not end up with a better deal)”. With that said demand can see a decrease, again – especially if the cost of financing starts to exceed what buyers are willing or able to pay. Along with home loans consumers can see these affects in other areas as well; such as student loans, auto financing, and even credit cards which also play a role in consumer behavior.
Will a slight increase in interest rates affect everyone negatively or severely lessen demand? Certainly not, as long as there are still buyers in the market and financing is still affordable to them there will be a demand. For example, the borrower that is looking at homes more conservatively, they may not be as affected by a slight jump in an interest rate because obtaining financing is still affordable. Although it can knock some buyers out of certain markets and/or price points. For the buyer that is looking more within their maximum price point an extra $150 or so a month, can definitely knock them out of a specific purchase price or make a lesser price range more attractive.
In general lower interest rates or lower costs of obtaining financing will further encourage consumers and give them more confidence to purchase. How many times have we seen 0% interest, 0% down financing options marketed to consumers on larger purchases; such as home loans, car loans, or even a furniture purchase? This is because obtaining cheap or no cost financing is attractive (in the buyer’s eyes – getting what they want for LESS is always better).
Are rising interest rates all doom and gloom for home buyers in the market? Does this mean wait to buy? No not necessarily, as it depends on how much they increase and how quickly increases are implemented. Also there are multiple other factors involved. In addition the market will respond inevitably and does have a tendency to balance itself out in areas. Things that can help the affect of rising interest rates in the long run: Supply / demand, change in lender requirements, or overall lower cost of obtaining financing can all still make purchasing a home more cost-effective. In addition to this, different programs are always being implemented to create demand for consumers.
On another note with rising rates – rents are also increasing and it is definitely still possible to purchase a home for less in a monthly mortgage payment than you would pay in rent. Along with that the benefits of buying a home still out way renting by far. As you are paying down your principle, building equity, and able to deduct your mortgage insurance on your taxes. Along with not having a landlord to answer to.
Contact me for more details or any real estate questions you may have. We can also get you in touch with one of our preferred lenders to dial in just how much a change in interest rates could influence your purchase.