The surprisingly strong employment report that we got on Friday quickly upped the odds for a Fed Funds rate hike in December. October delivered strong job creation, surging average hourly earnings, a decline in the unemployment rate, essentially all of the ingredients that point to real strength in the jobs market.
So at some point in the almost here future, mortgage interest rates will move higher than where they are today. Signs of real economic recovery will dominate the financial airwaves, strong jobs report data will be delivered consistently and without asterisks, inflation will ascend to target, the Fed will finally raise short term interest rates and there will be joy throughout the land.
Unless of course you are planning on buying a home and may need a mortgage to help you do that. The affect that a Fed Funds rate hike will have on monthly housing budgets and what will happen to housing market activity are now active conversation. Generally speaking, higher mortgage rates mean higher monthly mortgage payments or less buying power.
My realtor friends mostly want to know what a rate hike will mean in terms of their clients buying power, so with all of this talk about what will happen when the Fed finally pulls the trigger on the highly anticipated Fed Funds rate hike, let’s look at how much house you will not be able to buy when that does happen.
Right now, a 30-year fixed rate mortgage with a 10% down payment on a $350,000 home at 4% will cost you $1,503.86/month plus taxes, homeowner’s insurance and PMI (Private Mortgage Insurance). That very same 30-year fixed rate mortgage with 10% down at 4.5% will cost you $1,596.06/month. That’s an extra $92.20/month and $33,191.54 over the 30-year life of your mortgage. If rates climb to 5% the incremental cost jumps to $184.40/month and $66,383.08 over 30 years.
Higher interest rates can also mean that some consumers may be forced to make a downward adjustment in their target price range. I spoke with Debbie Lansing, a realtor with Keller Williams in Montclair, NJ, and she cited real estate appraisal valuation guru Jeffrey Otteau, offering that “each 1% increase in interest rates translates to a 9% drop in the price of the house you can afford.”
***article from Forbes.com***