The Rise of Mortgage Rates: How Will It Impact You?

After historic lows in 2016, mortgage rates are on the rise. In October 2016, mortgage rates were hovering around 3.5% and as of December 15th, 2016, the rate was 4.5%. Housing agency Freddie Mac predicts that mortgage rates will continue to increase heading into the new year. So how will the rise of mortgage rates affect you?

The main impact of rising interest rates is a significant decrease in buying power. Rising rates can hurt your buying power even more than increasing home prices. For example, a 1% increase in mortgage rates has the same effect as a 10% rise in home prices. This means that a seemingly small upswing in your rate can drastically affect how much you can afford.

To better illustrate how quickly rates can increase and how that REALLY affects you and your buying power, let’s use a hypothetical situation. Imagine you wanted to spend $1,200 per month on your principle and interest payment with a 30-year fixed loan. (Remember this number does not include things such as property tax, insurance, PMI, or HOA dues).

Scenario #1 (October 15, 2016):

With low rates $1,200 can go a long way. For instance, if you locked into a 30-year fixed mortgage on October 15, 2016, your rate would have been 3.5% and you could have qualified for a mortgage of $267,233.

Scenario #2 (December 15, 2016):

Fast forward a couple of months to December 15th, 2016 (when this article was written) where the rate has increased to 4.5%.  Keeping the $1,200 per month payment with a 1% rate increase, you would now qualify for a loan of $236,833. This means that in the span of 60 days your buying power decreased 11.3% or $30,400.

Scenario #3 (1% Increase):

Now imagine you have the same $1,200 to spend but wait till spring 2017. Based on predictions and trends, rates increase another 1%, taking it to 5.5%. Now the maximum loan amount you could qualify for is $211,346. Compared to December 15th, this is a difference of $25,487, or a 10.7% decrease in purchasing power.

The above scenarios prove that you can save a lot of buying power by locking your interest rate in as soon as possible. Moving up your buying timeline by a few months will save you a large sum of money and get you a nicer home.

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For every 1% increase in interest rates, your buying power decreases by 9-11% (the percentage is lower on smaller loan amounts). This change would likely put many buyers out of the market for the home they truly want. Considering a 1% rate increase could be the difference between getting that extra bedroom, a certain zip code, better schools, or an older home versus a newer home.

So why wait and cost yourself more money? Get started by talking to a trusted real estate professional at LivingTN.com. Our trusted loan experts Legacy Home loans will help get you pre-approved and find the best loan program for you.

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