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As the year comes to a close, the Fed has decided to make one more interest rate increase to end 2018. Rates went up by a quarter percent yesterday. This is the fourth increase by the Fed this year. What will this mean for home buyers?
Higher Mortgage Rates
Although there is not a 1 to 1 correlation between Fed rates and mortgage rates, an increase by the Fed usually does result in some level of increase for mortgage rates. Let’s assume that mortgage interest rates do increase by a similar 0.25%. How will that impact buyers? Here’s a few examples based on different loan amounts. The P&I column represents the principal and interest payment.
| Loan Amount | P&I at 5% | P&I at 5.25% | Difference |
|---|---|---|---|
| $400,000 | $2147.29 | $2208.81 | +$61.52/mo |
| $475,000 | $2549.90 | $2622.97 | +$73.07/mo |
| $550,000 | $2952.52 | $3037.12 | +$84.60/mo |
| $600,000 | $3220.93 | $3313.22 | +$92.29/mo |
| $650,000 | $3489.34 | $3589.32 | +$99.98/mo |
Future Increases in 2019
The Fed also predicted that they will raise rates twice in 2019. This is certainly an incentive for any buyers to act now rather than later. Home prices are continuing to rise, although at a slower pace than previous years. With inclining prices and interest rates, waiting to buy can cost buyers a lot of money. Here’s an example of the impact on monthly mortgage expenses if rates were to rise a total of 0.75%.
| Loan Amount | P&I at 5% | P&I at 5.25% | Difference |
|---|---|---|---|
| $400,000 | $2147.29 | $2271.16 | +$123.87/mo |
| $475,000 | $2549.90 | $2697.00 | +$147.10/mo |
| $550,000 | $2952.52 | $3122.84 | +$170.32/mo |
| $600,000 | $3220.93 | $3406.73 | +$185.80/mo |
| $650,000 | $3489.34 | $3690.63 | +$201.29/mo |
Will the Market Experience Another Downturn?
With the market steadily rising for several years now, most people are wondering if we’re reaching the limit. Are we overdue for another drop? Unfortunately, no one can predict the future. There are only a few things that we know for certain.
- The market is currently strong.
- There is still a shortage of listings and an abundance of buyers.
- Interest rates will continue to rise.
History tells us that what goes up must eventually come down. However, it also tells us that overall, the real estate market follows and upward trend. Even if there is a drop, it eventually recovers and exceeds previous levels. With that being said, as a home buyer or home seller, you must decide for yourself when is the right time to buy or sell. Despite market fluctuations, real estate has always been and continues to be an important investment opportunity and wealth building strategy.
