But with the economy running on all cylinders now, the Fed has begun a series of rate hikes, with additional increases taking place throughout the year. Rising interest rates affect millions of Americans, from credit card holders to investors to homebuyers.
For homebuyers, as interest rates go back up to more normal levels, the cost of buying a house will also rise. But that’s not necessarily a game ender. To see how prices might be hit by rising rates, real estate consultant John Burns ran the numbers, assuming the rate for a 30-year fixed mortgage gradually moves up to around 6 percent – from the current average of around 4%. For homebuyers who lock in lower rates now, the cost of homeownership is still pretty affordable – depending on where you live.
Here in the Cedar Valley, we are fortunate to have the University of Iowa Community Credit Union, which offers a worry-free extended rate lock for new construction. The only program of its kind in this market, UICCU allows buyers to lock in a low rate with its in-house 5- or 10-year ARM as soon as they have signed an agreement with a builder. Then within 60 days, the buyer can take advantage of a “float” to a better rate or different loan product. This unique offer gives buyers peace of mind as well as a great rate.
If you’re still not convinced, there’s another motivating factor: Purchasing power.
Even one percentage point can seriously affect your purchasing power (i.e. how much house you can afford). According to Lawrence Yun, the Chief Economist and Senior Vice President of Research at the National Association of Realtors, a simple mortgage calculation shows a loss of about 12% in purchasing power from a one-percentage point rise in mortgage rates. For example, a person taking out a $200,000 30-year fixed rate mortgage at 3.75% rate would have a $926 monthly payment (just principal and interest). At 4.75%, and with the desire to keep the same monthly payment, the loan amount has to be cut to $177,500. The buyer’s purchasing power has been reduced due to the higher rate.
The bottom line? According to the experts at Freddie Mac, the days of historically low interest rates are ending for the time being. But reasonable, incremental rate hikes reflect strong economic growth, which could make the housing market even more competitive. So, if you have your eye on a particular home or neighborhood, you should probably get a move on before successive rate hikes put it out of your price range.
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