An emerging topic in today’s market is mortgage rates and their impeding rise. Undoubtedly, the Fed’s will hike short term rates this year. The million dollar question is— how many times? There are a litany of data points that go into the Fed’s decision and rate movements. For instance, the Consumer Price Index, Producer Price Index, Non-Farm Payroll report, Housing Starts, GDP, FOMC Meeting Minutes, Consumer Sentiment, Builder Sentiment, reports and speaking engagements.
The bigger question to ask is: How will these rate movements influence either my payment or purchasing power? To help summarize, here’s an example:
Let’s say you are looking to buy a $225,000 home, with a down payment of 5% and your credit score is 742. Under the current interest rate environment your principal and interest payment, on a 30 year mortgage, would be approximately $1,067.22. This same scenario, 6 months down the road, and assuming 2 FOMC interest rate hikes of .25% each, would put your principal and interest payment at approximately $1,098.97 (roughly a $32 a month increase).
To look at this from a slightly different perspective, let’s say your maximum total payment (including taxes, insurance and mortgage insurance) is $1,500 utilizing the same parameters as above. Under today’s climate, you could buy a home priced roughly at $225,000 – $230,000. Applying the same assumptions above as it relates to future rate decisions, 6 months down the road your buying power would be in the $220,000 – $225,000. As you can see, it will make a difference in your overall purchasing power as mortgage rates rise.
If you have the desire, motivation and means, now would be a great time to embark on purchasing a home as it will only get more expensive from here. Adjustable Rate Mortgages (ARM) financing will also become more popular as rates rise. At one point, they comprised about 30% of all mortgage originations. Depending on your unique situation, ARM financing may make a lot of sense.
It’s imperative to consult a qualified mortgage and real estate professional to help navigate the murky waters. The loan officers at Flat Branch Home Loans are available to assist you!