Rising mortgage rates do affect home affordability. If you're shopping for real estate, the recent interest rate increases might be a concern.
However, the relationship between home affordability and interest rates is more complicated than that, and the news may not be as bad as you think.
Whether youâ€™re buying or refinancing, now is a great time to shop for a home loan.Click to see today's rates (Sep 24th, 2017)
For good reason, everyone wants to get the lowest rate possible.Â Lower interest rates have several implications for home buyers:
The mortgage rate you secure not only impacts your monthly housing budget, it also affects your purchasing powerÂ --Â the amount of home you can buy with the budget you have.
Naturally, the question todayÂ for most homebuyers is this â€“ if rates go up, how muchÂ house can I afford on my salary?
As we officially hit the halfway mark in 2017, against analystâ€™s predictions, mortgage rates have not climbed to 4.5 percent or higher.
On the contrary; according to a report released by Freddie Mac last week, 30-year mortgage rates fell two basis points to 3.88 percent. And manyÂ experts now think rates will remain below five percentÂ for some time.
However, because rates are trending higher over time,Â itâ€™s important to understand the effect rising rates has on your affordability.
If the house you want is at the top end of what you can afford to buy, incremental rate increases canÂ derail your purchase.
With each quarter percent increase in interest rate, theÂ amount you can finance drops by roughly 2.5 percent.
For example, letâ€™s say that you and your lender determine that you can comfortably afford a principal and interest payment of $1,500 per month. The chart below shows how the interest rate for your loan program determines your maximum loan amount.
However, hereâ€™s an interesting fact that many homebuyers are pleasantly surprised to find out.
Contrary to popular belief, a 1/4th percent higher interest rate doesnâ€™t necessarily mean you are now way over budget, or that you can no longer qualify for that dream home.
Using todayâ€™s median U.S. home is valued at $199,200 as an example, letâ€™s say youâ€™re buying a $200,000 home and putting 10 percent down - per the National Association of Realtors, homebuyers financed 90 percent on average in 2016.
Using that average down payment of 10 percent, that means you would be financing $180,000. Letâ€™s say your mortgage is 3.875%. Using these factors, that means your principle and interest payment would be $846 per month.
Now, letâ€™s say rates go up by 1/4th of a point to 4.125%. Using the same scenario, your new principle and interest payment would then be $872 per month.
The increase to your payment is less than $26 per month for that one quarter percent rate increase. Not to say this increase doesnâ€™t add up over the years, but most homebuyers are pleasantly surprised to find out they can still afford that dream home even with the slightly higher rate increase.
While mortgage interest rates will always have a major influence on the ability to purchase a home, thereâ€™s another substantial factor to consider. This factor may even be bigger than mortgage rates â€“ inventory.
Largely due to the laws of supply and demand, the lack of available inventory tends to push home prices up, making your ability to buy a home more challenging. This is especially true for first time home buyers.
However, in areas where inventory is balanced with demand, increasing mortgage rates tend to push home prices down. In a CNBC article,Â Â real estate consultant John Burns analyzed the relationship between mortgage rates and home prices,Â assuming the rate for a 30-year fixed mortgage would eventuallyÂ increase to six percent, from recent levels of about four percent.
The result is that some overcooked markets like San Francisco, Silicon Valley, and Miami, could be overvalued by overÂ 20 percent.
But in markets where housing prices are more normal, prices are still undervalued. And that's even if mortgage rates move back up to six percent. Those undervalued markets include Chicago, Atlanta and Detroit.
Mr. Burn's chart shows the historical relationship between rates and prices in the US.
Current mortgage rates are lower than experts predicted they would be. Beware though, as most analysts expect them to creep up as the year goes on.
Even if the experts are wrong, fortunately slight rate increases donâ€™t necessarily mean you can no longer buy a home.
There are few upsides to waiting, though. Your home is too big of an investment with which to gamble. Now is a great time to take advantage of the lower than expected mortgage rates.Click to see today's rates (Sep 24th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)