📉Mortgage Interest Rates Are On the Rise
Rates are now almost a full percentage higher than they were this time last year, on average. With a strengthening economy, the cost of borrowing money goes up. I know, it’s a cruel joke…when the economy is weak, people are hesitant to take borrowing “risks”, but that’s when it costs less to borrow. When people feel confident about the economy, borrowing costs them more.
Affordability is largely influenced by the interest rate. If homeownership is a goal, then you must crunch the numbers to see what the real cost of ownership is…and you should also consider what the future numbers will look like, as much as possible. Although no one has a crystal ball, we have seen economic cycles come and go, and we can learn from a historical perspective.
🙃Real Estate Hindsight is 20/20
This is how the concept plays out in real estate: If you bought a house this time last year, you probably locked in at a rate of just under 4%…about 3.9% on average. If you bought the same house today, you would get a rate of about 4.9%*. It is more expensive to own the same house that you thought about buying last year. Add to that, values have risen about 5% to 7%, depending on where, and what type of home.
Let’s break that down and use $300,000, because it’s a round number and it’s right around the average sales price here in Frederick. Let’s use a simple mortgage calculator.
Last year, the $300,000 house would cost you $1418 a month in mortgage payment.
This year, the same house, for $315,000 (5% increase) will cost you $1676 a month.
That’s a monthly increase of $258. For the same house.
🤷Will Interest Rates Continue to Rise?
Interest rates recently reached into 5% for the first time in 8 years. Along with those rising rates, mortgage applications dropped off to the lowest since December 2014, according to USA Today. Refinances also have dropped, as the time for better rates has passed.
The Fed has been raising rates incrementally, and has promised to continue to do so as the economy heats up. The simple answer is yes, we can count on mortgage rates increasing, as well as credit card rates.
If you’ve been on the fence does this mean you should jump into the housing market? There are a lot of moving parts to consider about buying a home. Interest rates are only one component. Rates certainly have the most impact on the cost of buying a home.
How much higher? It’s hard to say for sure, but a rise of at least 0.500 percent wouldn’t be a shocker.
🏘️Home Prices Are Rising, Too
But there’s more to consider here than just the interest rate. What if the home you want to buy increases in value over the next year? According to the Core Logic Case-Shiller Home Price Index, home prices nationally have been rising more than 5 percent per year for several years now. This is true for the Frederick real estate market over the last year. Can you afford to wait a few more years, and add up to $30,000 to the already hefty price tag of a single-family home?
🤨Looking Deeper into the Numbers
Let’s assume that the home you want costs you $300,000 today. Let’s also assume that you have 5 percent down and a 30-year fixed mortgage at 5.000 percent.* Then, let’s assume that for the same home next year you would have to pay 5 percent more, and an interest rate of 5.5 percent. A detailed life-long comparison looks (om simple round numbers) like this:
| Today | This Year | Next Year | |
| Purchase Price: | $300,000 | $315,000 | $15,000 |
| Down Payment @ 5% | $15,000 | $15,750 | $750 |
| Mortgage: | $285,000 | $299,250 | $14,250 |
| Interest Rate: | 5.000% | 5.500% | 0.500% |
| Payment: | $1,530.00 | $1,699.00 | $169.00 |
| Lifetime Payments: | $550,779.00 | $611,679.00 | $60,900 |
| Lifetime Interest Cost: | $265,779.00 | $312,429.00 | $46,650 |
What does the decision to put off buying for one year cost you? With these assumptions, you have to come up with an additional $750 for your down payment, which may or may not seem nominal. Over the next 30 years you’ll pay an additional $60,900 in payments.
You will pay a little more for mortgage insurance, which I haven’t added into the table above. This is just straight math.
🤔So…Buy Now?
There are more things to think about than just the above simple math. Homeownership is the key to wealth-building for most Americans. You must live somewhere. If you can pay yourself via a mortgage, rather than paying someone else’s mortgage by renting, it’s the way to build your own equity, not someone else’s.
There are several other aspects of the decision to buy a home: Do you have enough savings to afford the down payment and still have a cushion? Is your employment stable? Is there a possibility you might move for a new job within the next 5 years? Are you ready for the responsibilities of homeownership? These questions and more are all part of the process of deciding when to buy your first home.
📉Lowering Your Interest Rate with Points
When interest rates are rising, buyers have another option…they can lower their interest rate with points. There are usually a lot of questions about points…
“What are points?”
“Should I pay points?”
“What about NO points?”
Here’s a bit of information from one of our preferred lenders, to give you some things to consider:
- Discount Points are pre-paid interest that allows a borrower to lower their interest rate on the amount they borrow. Because points are prepaid interest and mortgage interest is tax deductible, points are tax deductible. (See your accountant for rules on refinances.)
- One point is equal to one percent of the loan amount. One point may lower the rate on your 30 year mortgage .25%. These numbers vary with lender as well as with market rates.
- Here’s a scenario:
- On $200,000 loan, one point would be $2000.00.
- The difference in your monthly payment from a 4% rate ($954.83) to a 3.75% rate ($926.23) on a 30 year fixed rate loan would be $28
- Are you better off spending $2000 today to save $28 a month? It will take you about 6 years to make your money back. For most, it’s easier to find $28 a month than to save $2000. On the other hand, if you expect to have this loan for 30 years, your $2000 expense will wind up saving you over $10,000.
- Often, I have advised clients closing toward the end of the year to pay points because they can “get back” a good portion of the cost quickly if they file their tax returns early. The theory is you can spend $2000 and get the benefit of it but, after your refund, maybe you really only spent $1500.
- Because many first-time buyers are in the market, and often don’t have a lot of cash, some transactions today are written with seller’s concessions in which the seller offers to pay all or some of your closing costs. At time of contract signing, there is an estimation of what that will be. Whether your contract says a flat dollar amount or a percentage, there is often a few extra dollars available at time of closing. A few days before closing, you should ask your LO for a more accurate number because you may have a few bucks the seller can pay to secure you a lower rate. If you don’t do it, the seller just walks away with more money than they agreed to.
Pricing on your mortgage can be complicated, but an experienced loan officer make it simple to understand. Take the time to look at it from multiple angles. Use your LO as a resource and adviser. Most people only ask about rate and closing costs. Go deeper to get the real answers.
~ Thanks to Mike G. from M & T Mortgage
*Interest rates subject to change.
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