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What Rising Interest Rates Mean When Buying A Home In Snohomish County
As you may already know interest rates have been going up and they predict they will continue to go up for the next couple of months. This is happening on a global scale, not just in Snohomish County. We have been hearing a common question from buyers lately that we think is important to address. The question is “What do rising interest rates mean to me as a buyer?”.
Interest rates have a lot of weight on your purchasing power as a buyer. For the last couple of weeks, right after the election, we have been noticing the interest rates creeping up. However, don’t let that scare you because looking at the big picture the rates are still very low. Rates have been historically low in all of 2016. In the past rates have been over 10% and right now they are still around 4%.
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What does a higher interest rate mean?
The people who notice the rates rising are the ones who have already been pre-approved. These buyers started with a lower interest rate when they first started looking at houses. As a result of higher rates, they now have to look at lower prices of homes. When interest rates go up, it limits the buyer’s purchasing power. For example, let’s just look at buying a home for $250,000. If the interest rates rise by just 0.25%, you will need to earn an additional 3% in income to qualify for the same $250,000 house. If you don’t know if you will be getting a three percent raise then you will have to buy a house for 3% LESS in price. Also, for every 0.25% increase in interest, it will cost you an additional $9,518 in interest payments over the course of the loan!
When the rates go up your purchasing power goes down. Over the last couple of weeks, we have been in close communication with our lenders making sure that we are looking at the right price range for our buyers. Once you are in a mutual contract your lender can lock in your rate. This will help you to stay qualified while going through the home-buying process.
What can you do to lower the interest rate?
Now that you know what higher interest rates do to your purchasing power you might be wondering what you can do to keep your rate low. First, interest rates are determined by the borrower’s credit score, down payment amount, and loan program. If your credit score is below 700 there is usually a hit to the interest rate. Make sure that your credit score is decent and that you have a down payment. In addition, you can buy down your rate and lock it in. Buying down your interest rate means that you pay money to get a better interest rate.
Some buyers end up with extra closing costs money that the seller agreed to pay, and they use that money to buy a better rate. Locking in the rate is something the lender can do as soon as you are in a mutual contract. If they feel this rate can’t get any better or if they think the rates are going up they will lock you in. This will make it so you can keep the lower rate no matter how high the interest rates go up.
Should I buy now or wait?
With the information on interest rates rising, I can say that right now is hands down the best time to buy a house. Buy while the rates are still in historically low numbers. Every source we look at suggests that rates are expected to keep rising for the next few months. Many buyers want to wait for the price of homes to go down. Consequently, if the interest rates rise while you are waiting for prices to go down you will end up with even less purchasing power. So if you are in a position to buy, we highly recommend buying sooner than later.
Another factor to consider is that rentals are extremely expensive right now. In many scenarios, it is less expensive to buy than to rent. According to Freddie Mac, interest rates would have to reach 9.1% for renting to be less expensive than buying a house. That is a big jump from 4% to 9%!
Here is an example of a couple of different loan programs’ interest rates and how they have been affected by the rate hike:
| Conventional Loan With 3% down | FHA Home Loan | VA Home Loan | USDA Home Loan |
|---|---|---|---|
| Difference in payment between a rate of 4.125% and 4.375% | Difference in Payment of 3.5% and 3.875% | Difference in payment of 3.5% and 3.875% | Difference in payment of 3.5% and 3.875% |
| Middle Credit Score of 700 | Middle Credit Score of 700 | Middle Credit Score of 700 | Middle Credit Score of 700 |
| Loan Amount of $300,000 | Loan Amount of $300,000 | Loan Amount of $300,000 | Loan Amount of $300,000 |
| Down Payment: $9,000 | Down Payment: $10,5000 | Down Payment: $0 | Down Payment: $0 |
| Funding Fee: $0 | Upfront Mortgage insurance financed: 1.75%- $5,066 | Upfront Funding Fee financed of 2.15%- $6,450 | Upfront fee of 1% financed: $3000. |
| Loan Amount: $291,000 | Loan Amount: $294,566 | Loan Amount: $306,450 | Loan Amount: $303,000 |
| Principle & Interest @ 4.125% APR: 4.195%- $1410.33 Principle & Interest @4.375% APR: 4.447%- $1452.92 Difference: $45.59 | Principle & Interest @ 3.5% APR: 3.566%- $1299.98 Principle & Interest @3.875% APR: 3.844%- $1361.34 Difference: $61.36 | Principle & Interest @ 3.5% APR:3.737- $1376.10 Principle & Interest @3.875% APR: 4.118- $1441.04 Difference: $64.94 | Principle & Interest @ 3.5% APR:3.4.005%- $1360.74 Principle & Interest: @3.875% APR: 4.385%-$1424.96 Difference: $64.22 |
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