The Fed Raises Interest Rates: What Does this Mean for Home Buyers?
The Federal Reserve announced that they are finally going to increase interest rates, after a long period of a zero federal funds rate, which allowed for steady record-low interest rates across the United States. For the past few years, the average 30-year fixed loan remained at less than four percent. Their decision lets us know that we should plan on seeing a quarter-point increase in late 2015 or in early 2016.
This increase in interest rates will directly affects home buyers and what price range of home they can afford. Generally, when interest rates are lower, buyers can afford higher priced homes, because their monthly mortgage payments are lower. Prior to purchasing a home, most buyers have in mind what they are willing to spend each month on their mortgage payment. As these rates start to creep up, the amount buyers will have to spend on their fixed monthly payments will also increase, so buyers are not going to be able to get as much home for their money. It is also important to keep in mind that as these interest rates start to go up, some borrowers who once qualified for a mortgage will now have trouble qualifying if rates rise by even just a half a percentage point. As a result, home buyers will be forced into a lower priced market, since these more expensive homes will no longer be attainable for them to buy.
So what will this increase in interest rates do to your monthly payment? Let’s do some quick math to demonstrate…Monthly payments on a $100,000 home would go up about $20 a month, a $300,000 home mortgage payment would increase by $45 a month, and a $500,000 home would go up about $75. That may not seem like much at first, but over the life of a loan, that can really add up! To show you exactly how this could affect a home buyer’s total interest payment, let’s use the $300,000 home as an example. A home buyer who purchases a $300,000 home with a loan at 3.95 percent 30-year fixed mortgage, your total interest payment would be $212,500. If the rate were to increase less than half a percentage point to 4.25 percent, you’d pay a total of $231,295 in interest. That’s a $20,000 difference! (Think of ALL you can do with an extra $20K in the bank!)
It’s clear that an increase in interest rates will affect all home buyer’s future purchasing power, making now the perfect time to buy. While rates are still low, contact us now! The Elite 757 Team is experienced and available to help you with all your real estate needs. Whether you are a first time home buyer, or this is your 10th real estate transaction, let our knowledgeable team turn your home buying dreams into a reality.