Wednesday, June 26, 2013

Will $69 a Month Kill Home Sales? Interest Rates Are Still a HUGE Bargain

Home Sales and Prices Up Again on June 24.  Now Mortgage Interest Is Up.  What Will be the Effect?


The doomsdayers are at it again.  Mortgage interest rates shot up to 4.4% from 3.5% in just a week.  There goes the housing market.  Are they right?  What effect does rising interest rates have compared to rising home prices

The average sale price of a home in the US today is $150,000.  In 2008 that price was $250,000.  The effect on the down payment at 20% would be $20,000 less today than then.  The effect on the mortgage amount per month assuming a 5% interest rate would be $1074 then, and $644 now.  So today I can buy the average house with a monthly cost $430 per month lower than 2008, even at 5%.

The savings per month on the monthly mortgage payment today vs 2008 on the average US home is $430 per month

Let's look at the more luxurious home with a $700,000 price tag and a $560,000 mortgage after $140,000 down.  That same home in 2008 would have cost at least $850,000 and required $170,000 down.  The difference in monthly payment based on a 5% mortgage interest rate $1644.00 per month.

Now let's play the same game with an increase in mortgage interest from 3.5% to 4.5%.


On the $150,000 home, the monthly payment would go up $69 per month.  On the $700,000 home, the monthly would go up $389.00.  For the owner of each type of dwelling this probably represents two nice dinners out per month.

The effect of the mortgage interest rate increase from 3.5% to 4.5% is $69 a month on the average US home.

Therefore as a prudent buyer wanting to keep my out-of-pocket in my pocket and my monthly expenses as low as possible, I should be much more concerned about property values going up than I am about interest rates going up.  The impact is far higher on the former. 

If home prices and mortage rates both go back to 2008 levels, the combination would be pretty effective at killing the housing market.  However, there were folks lined up in 2007 to buy those homes at those prices with those interest rates.

Today is still the best time to buy a home in 30 years or longer based on your overall cost to own.  And it is highly unlikely that the future will provide better or even the same cost of ownership as today.


New Contact Information for Bill Rayman

Bill Rayman Home Mortgage

12121 Wilshire Blvd
Suite 350
LA CA 90025

424-354-5325

bill.rayman@guaranteedrate.com

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