Friday, June 21, 2013

Higher rates create problems for entry level buyers.

Rates have been on the steady increase for the last six to eight weeks. This creates trouble for entry level buyers that may find themselves priced out on payment.  Homes in Clark County under $165,000 are few and far between. Those that are priced as such often will not qualify for FHA or VA financing.

As rates go up the monthly payment for the same priced home goes up. Banks typically require approximately three times more monthly income than the full payment on the loan. Different loan programs vary and credit profile is a factor as well. This is just a general rule. Whether or not income is three times, four times or double, the premise regarding affordability remains the same. When rates go up buyers lose purchasing power even if prices remain flat. Prices however are not flat they have been rising all year as well. That spells double jeopardy for buyers who hold out too long.

The chart above shows the payment difference on the same $200,000 home with rates ranging from a rock bottom 3.5% to 6% which is still below the 40 year average. The minimum income to qualify is based on the standard three times the payment rule. Notice how the 3.5% loan allows a person with much less income buy the same house that requires $60,000 a year at 6%

The federal government is keeping rates low partly by directing Fannie Mae and Freddie Mac to purchase loans well below the actual market rate for a 30 year mortgage.  Other fed maneuvers are used to push the cost of money down as well.  As the government begins to tighten up on the money supply, rates will rise and 6% is not unrealistic based on the disposition of investors for mortgage paper.  

Notice how a rate change of just 1/2% translates to an FHA payment nearly $60.00 a month higher on the $200,000 home in the example. 1% higher equals a payment well over $100 more each month. That is $1200 a year or $12,000 over a ten year period of ownership.

I am seeing too many buyers hesitate on home purchases and some may hesitate themselves into a rental unit. Inventory is tight and buyers need to step up and pull the trigger before the rates price them out of the market.

In the current climate that has both rates and prices going up the cost to own a home rapidly increases.

In the chart above the same three bedroom two bath home that sold last year for $150,000 may cost $175,000 this summer and $200,000 next summer. The same house! With rates on the rise the payment is amplified twice, once by the larger loan amount and again by the higher rate of interest.

No one knows for sure what rates will do over the next twelve months nor do they know what home prices will do.  The uncertainty about next year however, does not stop what's happening right now. Many people buy homes with the idea that they will someday pay it off and have no payment or that they will use the equity in the home to purchase a bigger or better home in the future.  Every day that goes by without owning that home is another day added to the day you are free and clear, or the day you move up to the dream home.

Think about it.

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