Could Higher Rates Price You Out of Home Buying This Summer?
After a Decade of Low Mortgage Rates, Things Might Be Changing
American home buyers have been on a roller coaster ride over the last decade and a half, and despite many forecasts, this year could prove to be just as rocky, especially if the Federal Reserve decides to raise interest rates.
When the housing market bottomed out in 2007, the Federal Reserve was forced to drop interest rates down to near-record lows in order to help keep the housing market afloat. But what goes down has to eventually come up and this summer might be time when the rates climb to more normal levels.
So what does this mean to American home buyers looking to purchase a home in the coming months? Here’s what higher rates will likely mean for home buying this summer.
Higher Rates = Higher Mortgage Payments
The biggest impact higher rates will have on the housing market will come in the form of higher mortgage costs. For some, this could actually price them out of a home they might have been able to afford just a few months ago.
Consider this: in September of 2016, the average national rate for a 30-year fixed mortgage was just 3.3%. But by mid-December, that rate had climbed to just over 4.15%. That’s a jump of around 85 basis points in a matter of two months’ time.
If you apply this to a real-life situation, it would mean a homeowner’s mortgage payment on a home price of $304,500 after the usual 20% down would be would be $1,070 per month at 3.3% or $1,187 at 4.17%. The slight rate increase resulted in a monthly increase of $117 for the buyer.
The Federal Reserve is projecting that it will continue to raise the national rate, albeit gradually, by as much as two full percentage points by the end of 2019. So, we can expect with some reliability that the rates will climb throughout the summer and beyond. As stated, the increase will be gradual, but home affordability is certainly going to affect some potential buyers.
This also means that if you’re a homeowner with an adjustable-rate loan, then now might be a good time to see about getting into a fixed-rate loan or you can expect your mortgage payments to steadily move up over the next two years.
There’s Still Hope
For homebuyers looking to get into a home, the good news is that the rates are still pretty low, so the cost of homeownership is still affordable depending on where you live.
In the country’s most expensive markets like New York, San Francisco, Honolulu, Los Angeles, and Orange County in California, buyers should expect the cost of buying a house to eat up at least half of the average income. But, by buying in a less-expensive city like Atlanta, Pittsburgh, Philadelphia, Cleveland, Minneapolis, or Detroit, your mortgage payment would only account for 20% or less of the average income.
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