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I didn’t lock in my interest rate and my payment went up by how much?

Type-Of-Mortgage-Loan

Many people found out recently the answer to this question. Interest rates over the past 3 months have gone from 3.4% to 4.64%. They are now coming back down, but the fear is now present in everyone’s minds. The Federal Reserve has given us a warning, stating rates will increase as long as the economy improves. Lets look at the purchase power of a $xxx,000 loan at 3.4% and the loan at 4.64% with the same payment of $2,000/month for a 30 year fixed. All figures below do not take in account deposits, PMI, credit score, etc. it is a simplified version to direct the attention to the true change in numbers based on rates.

At 3.4% a $2,000/month payment for 30 year fixed would get a $451,000.00 home.

In comparison a 4.64% loan $2,000/month would only purchase a $389,000 home.

 

Big difference isn’t it 15% decline in 3 months. What if you didn’t lock-in your rate and the rate jumped up that much while you were in the process of purchasing. You may not be able to afford the home you previously qualified for. It is being discussed that the recent home price increases will be depleted due to the interest rate increases. This could happen, but take a look at the chart below. If you look at historical charts of prices and rates they do not have a direct correlation but do trend similarly to a point. Overall you can see a x forming in the two lines of the graph. However they are not a 1:1 ratio.

RealHousePricesMortgageRates

 Graph provided by Fifthestate.co

If you look closely at the chart rates have spiked in the past and it did not cause prices to plummet. See 1978-1985 rates and prices. Outside factors always influence price. Not everyone has to borrow in order to purchase a home, so prices will not crash due to interest rates. It does however take a number of buyers from one price range to another. Resulting in slightly lower prices.

Back to the original question. Lets say you had planned on buying a $400,000 home at 3.5% and now rates went up to 4.5% before you locked-in your rate. The monthly payments would have gone from $1,796 to $2,026. That could have taken you out of your range to qualify for your purchase. If you waived your financing contingency to win in the bidding war you just went through your deposit is now as good as gone. Be careful with your interest rates and get your real estate agents help to identify what the best thing to do is. Thanks for reading.

Anthony Rosso

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