Interest rates have steadily increased over the past several years, and the trend is expected to continue as we head into 2019. Subsequently, it is important to have an understanding as to exactly what that means and how it affects house payments overall.
By understanding exactly how rising interest rates can affect home payments, you can avoid purchasing a home that you cannot afford, and you can instead make sure to factor in the increased interest rate before deciding on a home to purchase.
Interest rates are an unfortunate reality in the home buying process, and it is important to know how to deal with the rising interest rates to ensure you purchase a home you can truly afford.
What Is an Interest Rate?
An interest rate, or mortgage rate, is the rate of interest charged on a mortgage, which is established by the lender before the sale takes place. There are multiple factors that are considered in determining an interest rate, including collateral, principal, and taxes. The borrower’s credit score often plays a large factor as well.
The lower the interest rate, the less a person is required to pay in total for the purchase. The higher the interest rate, the higher the cost of the overall purchase.
It is important to factor in the projected interest rate into your home purchasing decision in order to determine how much you can afford to spend on a home.
How Interest Rates Affect House Payments
So how do interest rates affect house payments exactly? In order to best answer this question, let’s take a look at an example:
Let’s say you can afford to pay $1,500 in monthly payments and let’s also assume the loan is over the course of 30 years. At a 4.6% interest rate - which is approximately what can be expected today - the home buyer can afford to buy a home of $300,000, which results in a monthly payment of $1,476.42 (not including fees outside of mortgage and interest).
However, interest rates are expected to continue rising, so it is important to be prepared for higher rates. Now let’s say the interest rate rises to 5.0% and all other factors stay the same. The monthly payment then raises to $1,546 dollars, and the home buyer would need to buy a home for $290,000 or less to get to their target monthly payment.
In the event the interest rate rises to 5.4% - which is likely in 2019 - the home buyer would need to purchase a home under $280,000 to stay at their target monthly payment.
How Much Are Interest Rates Rising?
Interest rates are expected to continue rising in 2019 from the 4.6% expectation in 2018. Most experts predict that rates are going to rise to an average of 5.3%, and they may reach as much as 5.5% during 2019.
Subsequently, it is important to base your purchasing decision around the rising interest rates.
Annette Masterson is a licensed broker with EXIT Realty Bob Lamb & Associates in Murfreesboro, TN. She has developed one of the most successful real estate teams in Rutherford County, known as Masterson Network, that specializes in new home construction and residential listings and sales throughout Middle Tennessee. You can email Annette at firstname.lastname@example.org or call her at 615-896-5656 (Office) or 615-533-1660 (Cell) for more information.