Over the past few weeks we have seen interest rates (read this as “the cost to borrow money”) increase on all sorts of loans. For comparison sake, let’s look at a 30 year fixed rate loan. Less than a month ago you could lock in a rate in the mid to upper 4% range. Today that same loan is over 6%. Now 6% is obviously still a GREAT rate historically! But let’s take a look for a minute at what this means to an “average” US home buyer. Sellers read on - there is information for you too!
Let’s use a loan amount of $200k
@ 4.625% your monthly P&I (principal and interest) would be $1028.28
@ 6.125% your monthly P&I has now jumped to $1215.22
This is an increase of $186.94 or 18.2% in your payment (did housing prices in your marketplace drop 18.2% over just the past few weeks?)
This means you will pay an extra $2,243.28/yr or an extra $67,298.40 over the life of the 30 year loan
Well, maybe we should wait for rates to come back down . . .Ok, that might make sense. Let’s take a look at what we know about interest rates . . .
Interest rates are the reward or return and investor/lender receives for the risks associated with making a loan. How do you think most lenders are feeling about the risks associated with mortgages right now as each month the # of defaulting loans goes up and up?
If you don’t remember what has happened in the past when unemployment rates rose, when there was trouble in the financial markets, when prices on commodities (things like oil) rose, and when there was global political unrest. Ask someone where interest rates went in the later parts of the 1970’s and 1980’s (I’ll give you a hint: mortgage rates hit double digits and the first digit wasn’t a “1”). Do we have any of those factors happening today?
So what is the lowest mortgage rate you have ever heard of? I’ve heard of fixed rates down into the high 3’s and low 4’s.
So what is the highest mortgage rate you have ever heard of?
Based on your answers to the last 2 questions, which direction can rates move more?
When do you think you should be locking in a rate and buying???
Ok sellers, it’s your turn.
Let’s assume your house was the one we used in the example above with the $200k mortgage. If no one was willing to buy it when the payment was $1028.28/mo how likely are they to buy it with a higher monthly payment (read this as “less affordable?”)
How much do you think the payment would have to drop to get someone interested?
Let’s pretend you said that you thought a 10% drop would be enough, ok?
$1028.28/mo – 10% ($102.83) = $925.45
In order to get to the $925.45/mo payment that someone might actually be willing to commit to for your house, with rates now at 6.125% they would now only be able to borrow $152,309.74 – Can you say OUCH?!?
Want to know the even worse part?
Let’s assume that when you sell you are moving up to a home where you will have a $300,000 mortgage payment. If you had sold and bought when rates were at 4.625% your payment would have been $1,549.42. BUT you didn’t, so now if you adjust your price, get it sold and lock in rates at 6.125% your payment will only be $1,822.83 or $273.41/mo higher.
Of course that’s only $98,428.18 over the life of that 30 year loan – Can you OUCH and then OUCH again?!?
I’m curious, which do you think is more likely to happen over the next year as the world no longer is willing to accept the risk associated with buying the USA’s debt, interest rate go from 6 to 9% (a 50% increase in the cost of money?) or prices drop another 35-50% ???
