How will the Federal Reserve Raising Interest Rates Impact You?

On December 16^th,  2016 Chairman Janet Yellen announced that The Board of Governors of the Federal Reserve (Head of the Bank of the Banks) were raising interest rates. 

http://www.federalreserve.gov/newsevents/press/monetary/20151216a.htm

Chairwoman Janet Yellen is the first woman to hold this position. Chairwoman Yellen took over the position from Ben Bernanke and was sworn into her office on February 3^rd, 2014 after the senate confirmation in January 2014.

The Prime Rate adjusted in sync with the announcement.  However, most of the loan market already expected this and mortgage interest rates had risen about 0.25% in the 10-14 days before the announcement in anticipation, so there was actually little movement in long terms rates at the time of the announcement.

But, what does this mean for you? What does this mean for your clients? What is the actual cost?

The Federal Reserve has already raised interest rates by 0.25% and plan to continue raising rates 0.25% until next December so there will be a full 1% increase in interest rates. That doesn't sound like much, but for most people it actually adds up. Take a $300,000 home for instance. For each 0.25% increase in the interest rates on a $300,000 loan, that's an extra $43.56 a month. So over, the next year, if you are buying a $300,000 and the interest rates go up by 1%, that's an extra $174.24 a month in interest you'll be paying. That's easily a student loan payment, a car payment or a nice dinner out. If you look at it on an annual basis, it's over $2,090 a year in additional interest costs, which is over $10,400 over the next five years!!  Now, you may think, well, that’s more of a tax deduction for me since it’s interest. Be sure to check with your CPA to see how that change will really impact your bottom line. But I say, a penny earned is a penny save, and even more important, $2,000 saved is by buying now is free money!

So, if you are considering buying a home, do it now! Get pre-approved and start planning now.

These interest rates are for the purposes of example only.  You are not guaranteed these rates, you may or may not qualify for a loan.

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How Does Oil Impact Interest Rates?

How does the economy impact interest rates? Oil, stocks, bonds, Federal Reserve Chairman Yellen, flying monkeys...how do these factors play out in regards to interest rates? This is a hot topic right now, as reported by CNBC's Trading Nation this morning.

Well, you can watch a plethora of TV shows, read a ton of newspaper and blog articles. Or you can consider interest rate as merely one factor in your choice to buy a home.

I think that interest rate is an important factor while considering whether or not you will purchase a home. However, there are several other critical items to ponder. Obvious questions to ask yourself would be, "Can I afford the total monthly payment?" "What other bills may come up that I'm not anticipating?" "Will I need a new car in the near future, how much will that payment be?"

In addition to the economic piece of the equation, I think this is a very personal decision.  I know that sounds obvious, but just as important as how hot the real estate market is or is not or where interest rates will go, is an individual's plans for the future.

I believe there are at least two sets of questions that we should ask ourselves when considering the purchase of a home. The first set of questions has to do with a person or family's plans. Am I going to stay in this city, this state, this neighborhood for 1-2 years?  3-5 years?  How is my job stability? Do I love my job?  Can I work from anywhere? Am I single or engaged? Am I planning on growing my family?

The second set of questions has to do with the economics. What do I need/want in my housing? Can I rent a luxury apartment or do I need a 4 bedroom house? What's the cost of renting vs. buying? What's the cost per square foot of renting vs. buying? Does it cost more or less to rent than to buy? Any excellent licensed loan originator as well as real estate agent should be able to help you with this calculation in your local area. Basically you take your total estimated monthly mortgage payment including property taxes, home owners insurance and any monthly home owners association or condo fees and compare it to the cost to rent something similar in location and size. To make it more complex, factor in your down payment and estimated closing costs spread over the time you think you will be in that location as well as any interest deduction your CPA thinks you would benefit from by owning. Other factors to consider are leverage and appreciation.

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