Today, I am keeping it short and sweet. I wanted to shed one ray of light on the subject of interest rates rising in the next year. Fairly much, everyone out there who watches the news or reads it in some form digitally knows that interest rates are still really low yet are destined to rise in our near future, starting some time after the new year. What I thought that I could add here is a chart I came across that gives a better idea of what impact that may have on your future purchasing power.
I shared in a previous blog post that with each point the interest rate goes up, buyers lose about 6% in their buying power. For argument’s sake, let’s say you were aiming to buy a $300,000 home. You’d played your cards right and gotten that pre-approval letter first before shopping for a home; you know exactly what your family can afford in monthly housing costs which is a $300,000 home, but oh wait! The rate has gone up which means that $300,000 house you two fell in love with will now cost too much in principle and interest each month. The solution is to drop thee ceiling of what you can afford by 6%. Instead of being able to afford a $300,000 home, your family needs to lower the ceiling to $282,000.
Luckily, the Federal Reserve is not a fan of sabotaging our country with whole point rate hikes, so the above picture is more accurate for a long term change. The rates are likely to go up, yes, but by quarter percents, not whole points. If you and your family are toying with the idea of buying in the future, say in 3 years then this post is a wake up call because our rates will be up no telling how much higher in 3 years. The rest of us can appreciate the chart I found and posted below. It shows you a national average priced home, $250,000, and assumes an aim of monthly costs no higher than $1,100. You can see how raising the rate by a quarter percent impacts the combined principle and interest payments.
Past this chart, I’d only add that if you plan to buy in the near future, say 6-9 months, it would be wise to meet with a lender and get pre-approved, and more importantly, lock in a rate. Yes, that is possible and with some lenders, for no fee. Now there is a limit to how long the lock will last, but I would not fret that. When/if the locked rate expires, just lock it in again. Doing so will likely secure a lower rate for you during the time you are house shopping, and if it doesn’t, well you were safe and not sorry. 🙂