How do the higher mortgage rates in 2015 affect homebuyers?

Have you seen the articles about mortgage interest rates being on the rise in 2015?

Wow! Sounds daunting, right? Don’t get too nervous. Overall, interest rates are near record lows considering rates over the past 50 years. The Federal Reserve has not made any changes to the prime rate since 2008. The prime rate is the interest rate at which banks borrow money from the Federal Reserve. So, why the change in mortgage interest rates lately?

Well, there are a few other factors that affect mortgage rates. The stock market affects interest rates; usually there’s an inverse affect. When the stock market is going up, less people are buying bonds (the 10 year bond affects 30 year fixed interest rates), so that propels the interest rates to go up. This is what’s happened over the past week. However, with the introduction of quantitative easing, the inverse relationship is not always the case (just to make economics extra confusing). Also, the mortgage-backed securities prices affect 30-year fixed interest rates, as well.

What does this mean in real numbers?

Here’s an example for you. Let’s assume you are buying a home with a sales price of $300,000. Just to use round numbers, let’s assume you are putting down 20%. (Please email me directly at elysia@bestmortgagebook.com for questions and loan program options.) Okay, so if you are putting down 20% of $300,000, your down payment would be $60,000, leaving you with a loan amount of $240,000. With a $240,000 loan amount, if the interest rate is 3.75%, your principal and interest payment would be $1,111.48.

With a $240,000 loan, if the interest rate is 4.25%, your principal and interest payment would be $1,180.66. That’s a difference of $69.18. Most of this is tax deductable interest, so although it’s seems like it’ll cost you the amount of a Starbucks every other day, it’s a bit less when you factor in the tax savings. (Be sure to consult your CPA for the tax advantages of home ownership.) However, if you’re considering buying a new home and $70 a month is your breaking point, the difference of $69.18 becomes a whole different conversation.

So are the current “higher rates” really all that high?

Let’s look at this historically, when interest rates where 8% (they’ve been as high as 18%!), if you had a $240,000 loan amount, your principal and interest payment would be $1,761.03. That’s $580.37 more than your principal and interest payment of $1,80.66 with the current “high” rate of 4.25%.

So, overall, interest rates are still at all-time lows. The most important thing you can do is to make sure you are getting the best loan for you and the home you want. No sense in rushing and buying something you aren’t thrilled with just to get a “good deal.” Do your due diligence and get pre-approved so that you’re ready to move forward when you find your dream home.

***Please keep in mind this is only an example for illustration purposes.  These interest rates may not be available and/or you may not qualify for this loan type.

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