How much does a bump in interest rates impact home buyers?

I’m reading an article this morning, “When Mortgage Rates Rise”, which addresses something that I’m often asked and that I also addressed recently on post here. Essentially, the “experts” are predicting that we will mortgage rates trend higher to around the 5% range by mid to late next year. Historically, speaking, 5% is not a high rate… in fact, I’m sure I wrote a blog post about when mortgage rates dipped as low as 5% back around 2008 . Our “problem” is that we have become accustomed to fixed rates in the 3 to 4% range. Mortgage rates have been at artificially low levels for a long period. And I agree that we will see this end as the Fed continues to pull back their support of mortgage backed securities.

Just for giggles, I thought I would share a few examples of how a 5% interest rate for a 30 year fixed conforming mortgage compares to the rates we currently have available.

We’ll base the scenario on the same one that I use for my Monday mortgage rate updates. Let’s assume we have a home in greater Seattle with a sales price of $500,000 and a loan amount of $400,000 (20% down payment) with credit scores of 740 or higher.

As I write this post (9:15 am on Friday, September 26, 2014) I’m quoting: 4.250% (apr 4.341%).  With a $400,000 loan amount, the principal and interest payment (not including taxes and home owners insurance) is $1,967.76.

Here are a couple comparisons:

• If/when mortgage rates are at 5.000%*, and if a borrower qualifies for a maximum $1967.76 payment, this will reduce the loan amount to $366,540. Reducing their buying power by $33,459.
• If/when mortgage rates are at 5.000%*, and the borrower still qualifies for a $400,000 loan amount, the principal and interest payment will be $2,147.29. An increase of $179.43 in monthly payment for the same loan amount.

*The apr 5.147% for the 5.00% rate is an estimate only as I have no idea how 5% will be priced when/if 5% comes around. This is for comparison sake only.

If higher rates impact home sales, then you can expect that to trickle down to refinances too as most refinances require an appraisal. Appraisals rely on recently recently sold home to use as comparable properties (comps) to establish an appraised value. Right now, many appraisals for refinances are coming in strong in hotter markets, like the Seattle and Bellevue areas.

If I can help you with your purchase or refinance for a home located anywhere in Washington state, please contact me.