Today, we’ll talk about what rising interest rates mean for you as a buyer in the Wasatch Front.
We know that the Federal reserve Chairman, Janet Yellen, has increased the Federal Reserve rate. What we also learned at that time was the chairman mentioned her plans to continue to gradually increase rates each quarter. The first rate increase was anticipated, so the market was able to absorb most of that increase without seeing much of a change to long term loans like 15 or 30 year mortgages. The next 3 increases will see a bigger impact on the 15-30 year mortgages.
For our millennial home buyers, this is a bit of a challenge, as most of their young adult lives they have had rates at or just below the 4% mark. First thing to know is that the 42 year average for interest rates is 8.39%. If we hit the reset button at 1990 the average interest rate is 6.6%. All of my blog viewers over 40 are chuckling because they remember buying their first home at rates in the 8% to 15% range.
We likely will see interest rates exceed 5% by the end of 2016. Let’s suppose this is a 1% increase. This is how the 1% increase affects you as a home buyer on an averaged priced home along the Wasatch Front, which is about $275,000. Assuming the loan amount is the purchase price, the principal and interest payment for a 30 year loan at 4% is $1,312.89 if the interest rate goes up to 5% the principal and interest payment goes to $1,476.26 or $163.37 more than the 4% rate which is about 11% more per month.
Over the course of 30 years, a 4% loan with the original principal balance would be $197,642. On a 30 year loan with a 5% interest rate the total amount paid in interest is $256,453 almost $59,000 more you’d pay in interest if interest rates go up by 1%.
The thing to know is that interest rates will go up because they have to go up. When interest rates go up by 1% the cost of your home goes up by 10% or more. Another way of looking at this is that the home at $275,000 becomes the same cost as buying a home at $302,500.
I hope this makes sense and helps you digest the affordability of housing now versus the affordability of housing in a historically average market.