Rising Mortgage Rates Expected - Consumer Impact

It is going to happen...interest rates will rise as the economy and real estate markets improve.  Based on what the Federal Reserve tells us, that scenario may be set in motion soon.

The Fed isn't expected to raise base interest rates when they meet this week, but it's expected that they will send signals of what is to come.  They said that they would consider raising rates when unemployment goes below 6.5% and inflation is hovering around 2.0%, but the Fed will look at many more issues before deciding to raise rates.

Interest rates have been staying around 4.3%-4.5% for 30 year home purchase financing over the past several months, which is about 1% higher than a year ago.  Rates are expected to climb to between 5 and 5.5% by the end of 2014.

Of course, rising interest rates will have an effect on purchasing power.  A home buyer will be able to finance a higher sales price now versus what they can qualify for as rates increase.  At 4.5% for 30 years, the principle and interest payment is $1,013.37 on a $200,000 mortgage loan.

See below for principle and interest calculations at rising interest rates:

$200,000 at 4.50% = $1,013.37
$200,000 at 4.75% = $1,043.29
$200,000 at 5.00% = $1,073.64
$200,000 at 5.25% = $1,104.41
$200,000 at 5.50% = $1,135.48

            CLICK HERE to perform mortgage calculations for your price range

As you can see, going from 4.5% to 5.5% causes an 11% increase in monthly payment.  Assuming a $200,000 mortgage is a buyer's maximum approval at 4.5%, a 5.5% interest rate will reduce a buyer's spending power to $178,475.  Couple that with rising home prices (6.1% increase overall last year) in many locations, one can see the significance.  This will affect home buyers, as well as home sellers.

Rate increases are expected to be gradual throughout the year, but they are expected to rise.  Rates are still at or near historical lows we had not experienced priot to the past several years.  Before that, 6-7% rates were considered great.  The point here is to provide some persective on how rates will affect home purchases in the future.