We’re starting to see increasing news coverage of the upcoming interest rate increases. Rates right now are hovering at 5%, which is about as low as they have been at any time in this low-rate decade, and much lower than they were even two years ago (when we talked about “historically low interest rates). But they’re about to go up.
Essentially, the government is taking the position that the housing market should be recovered enough by the end of the Spring to stand on its own two feet. So the Home Buyer Tax Credit will be expiring, and the Federal Reserve will be ending its policy of keeping interest rates low through a campaign of buying mortgage-backed securities. Accordingly, most observers expect that the end of this support will likely cause interest rates to rise by the middle of the year.
What does this mean for you? Everyone understands that low interest rates help spur buyer demand, and in this market have helped stabilize prices after almost two years of declines. But if you’re a buyer, you might think that you should wait for prices to come down more.
So you can wait for prices to go down, ut just remember that if prices do go down, it’s likely going to coincide with an increase in interest rates. That is, rates will go up, sapping buyer power, and put downward pressure on prices.
If you are thinking of waiting, just remember a few rules of thumb:
- For every 1% increase in interest rates, your monthly payment goes up 10%. So if you’re borrowing $300,000, and rates go from 5% to 6%, your monthly payment would go from $1,610 to $1703. If you’re borrowing $500,000, your monthly payment goes from $2,684 to $2,838.
- For every 1% increase in rates, your buying power goes down by 12%. So if you want to keep your montly payment at, say, $2,000 a month, right now you can borrow $372,563 with that money. If rates go to 6%, you can borrow $333,583. If rates go to 7%, where they were just a few years ago, you can borrow $300,615.
The point is that if you wait for prices to go down, you could actually cost yourself money if rates go up by more than 1%. Prices have come down 25%, but you’d need them to go down an additional 12% to offset just a 1% increase in rates. And if rates go up 2%, to 7% (which is possible), then you’d need prices to go down an additional 24% — basically, they’d have to go down as much as they’ve already gone down over two years of a very challenging real estate market.
We’re not advocating that everyone run out and buy a home. But just be aware of what waiting will cost you. We’ve built this whole blog, and site, to help you understand the Home Buyer Tax Credit. We thought it would be helpful to give you some insight as to the rate environment as well.
