Interest rates have been inching upwards over the last few years with the Federal Reserve promising that more rate hikes are on the way. But do interest rates actually matter that much when it comes to your mortgage?
Yes. Here’s why:
Interest Rates Affect Home Affordability
If you’re in the market to buy a home, interest rates will affect how much home you can afford. According to The Motley Fool: “Each quarter-point swing in interest rates, up or down, changes the amount you can afford borrow by about 3%.” In terms of real numbers, if you wanted to borrow $500,000 and your interest rate for a fixed-rate mortgage was 4.5%, your average monthly payment would be about $2500. But if interest rates went up to 4.75%, your monthly payment would be about $2600. That might not seem like a lot, but it is a big difference in the eyes of the lender – and it also amounts to $1200 more per year!
So as mortgage rates go up, you’ll be able to afford to buy less house. Depending on the neighborhood you’re looking in, this could be the difference between buying a turnkey home or one that needs a little work – or buying in that neighborhood at all.
Adjustable-Rate-Mortgages Are Particularly Vulnerable to Interest Rate Changes
If you have an adjustable rate mortgage, you’ll definitely feel the affects of rising interest rates (if you haven’t already). Depending on the terms of your loan, your interest rate might change annually or more frequently than that. So even if rising interest rates haven’t affected you much, you’ll eventually feel the sting as your payments increase.
Rising Interest Rates Can Have an Inverse Effect on Home Prices
If you’re a seller, don’t think that rising interest rates won’t have any affect on the sale of your home! Usually as interest rates go up and buyer feels the squeeze of affordability, home prices come down a bit to compensate. Of course, there are a lot of other factors that go into pricing a home (location, schools, comparable sales, condition of the home, etc), but what buyers can and will pay for a home can also put pressure on home prices. Especially if wages haven’t kept up with housing prices.
You can always try to hold out for a better price, but if other sellers are lowering the price on their homes, you’ll have an even harder time trying to convince the buyers who can afford to buy your home that it’s worth it.
If you’ve been thinking of buying or selling a home in Pismo Beach, San Luis Obispo, or elsewhere on the Central Coast, now is the time to make your move! Give me a call to get started – (805) 441-1276