Mortgage Interest Rates: Mortgage Interest Rates Effect Home Affordability

MINNESOTA — Feb. 22, 2010 (FreeRateUpdate.com) - Due to low mortgage interest rates over the course of the past few years, little attention has been given to the affect of rising interest rates on the real estate market and the subsequent financial health of homeowners. The Shangri la of yesterday’s real estate market in most parts of the country has been checked by the reality of economic market forces. Considering the impact of this change in the real estate market both personally and for your clients should be a top priority.
   
Real estate is the largest asset that the average American owns. Understanding your home’s value and strategies for its financing should be at a main consideration when it comes to financial planning. Recently, I have noticed a trend of newly listed homes for sale which had previously been purchased within the past three years. Many homeowners have overpaid for their property when they purchased it and now that they are selling their home. Avoiding a loss or “short” equity position has become a reality for many Minnesotans. To illustrate this point I have outlined the scenarios listed below:

It is the summer of 2003, interest rates on the 30 year fixed rate mortgage is 5.50%, houses are being sold in a matter of a few days and a few weeks at most. You purchase a home for $250,000 and will be putting 20% down. Your $200,000 loan on at 5.50% will run $1,136 per month.

It is late spring of 2006, interest rates for the 30 year fixed rate mortgage rose to 6.625%, and at that time houses were taking at least three months on average to sell, with 35% more home listings. You purchase a home for $250,000 and will be putting 20% down. Your $200,000 loan on at 6.625% will run $1,281 per month, a difference in payment of $145 per month compared to three years ago.
    
The net affect of the slowing real estate market is that now often sellers are forced to come down in price to help “cover” the $145 per month difference.

Things to Consider:

Realistically determine how long you are planning to live in your home. If you are planning on being in your home long term, do you have a fixed rate mortgage? If not, it should at least be looked into. If you are planning on moving within the next few years have you thought about how higher interest rates could cause you to afford less when you purchase your next home?  Are you ok with this?
    
Historically, a fixed rate below the six percent range is still a very good rate. For more information or to discuss your mortgage needs further please give me a call.