Is it true that what goes down, must go up?
We’ve all heard that expression “what goes up, must come down” and we all know that the opposite is also true. When it comes to mortgage interest rates, homeowners and prospective homeowners are concerned that the record low rates we’ve all been enjoying since the financial crisis in 2007 may soon come to an end. Although we’ve seen a slight increase in home prices in the last few years, the rates have remained low long enough for the real estate market to bounce back. So what’s next and how will an increase in interest rates affect homebuyers? Let’s take a look.
How a rate increase will impact home prices
According to economists, if mortgage rates rise, the cost of buying a house will also go up. But this doesn’t necessarily mean it will be impossible to buy a home. Many experts predict that the rates will rise incrementally. For example, if you have a rate of about 3.9%, and your mortgage is $200,000 for a 30-year term, your monthly payment of about $943 may increase to $1000 with a half of a percent rise. An increase of that amount is not going to monumentally affect your financial situation. But if rates were to increase to 6%, the change would definitely be more dramatic and could cause economic strife and difficulty in making your payments.
Take this same example and apply it to a mortgage of $400,000 at a rate of 3.9%. An increase to 6% could almost put home ownership out of reach for many.
Certain cities would suffer more than others
In some of the most expensive real estate markets like San Francisco, Honolulu, Los Angeles, San Jose and New York, a rise to 6% would drastically increase prices and could mean consuming half of the average income of residents. It would also mean that homes in these cities may be overvalued by over 20%.
But in other markets, where housing is already more affordable, a rise to 6% would not have the same affect. In fact, economists report that homes in these markets are actually undervalued and a rise from the 3.5-4% average to 6% would likely mean expenditures of approximately 20% of the average income or less.
The good news is that no matter where you live or where you’re hoping to purchase a home, if you lock in low rates now, owning a home will be affordable and you’ll have little to worry about. And while there’s continued discussion, prediction, and speculation over what will happen next when it comes to mortgage rates, the best advice is to lock in your mortgage rates before anything changes. It’s also important to do your research and find a home that’s not overvalued in a location that is ideal for you and your goals. Because whether you’re looking for your family home or an investment property, finding the right property in the right market and the best rate is what will determine your ability to afford it for the long or short term.
For professional guidance or assistance in buying or selling your home, get in touch with us today. We are uniquely qualified to help you find the best deals or secure the best price for your property and since we grew up in South Florida, we have intimate and expansive knowledge of the markets.