Friday, February 25, 2022

What difference does 1% higher interest make?

Rates are on the move again and they are not going in the direction we prefer. Rates were solidly in the mid threes for the better part of last year and now we are seeing rate in the low to mid 4s. Now rates can vary widely based on the specifics of the loan and the borrowers financials but these are pretty typical.

The median priced home in Clark County is just a bit above $500,000. Let's say you are planning to purchase a home at $500k. Three months ago you might have qualified for a 3.5% 30 year rate. With 20% down you would borrow $400,000. I am deliberately keeping it simple excluding things like points, buy downs, fees, etc. The payment without taxes or insurance just the principle and interest (PI) would be $1796 per month. Now the same house at 4.5% will have a PI payment of $2027 per month. That's $230 per month MORE for the same amount borrowed. 

Buyers need to act now. Not only are they facing interest rate risk but housing prices last year went up more than 18% year over year. This year has not yet shown a slowdown. At that pace the $500,000 dollar home goes up at a rate of $7500 per month! Keep in mind that any rate under 6% is still below the fifty year average rate. But interest rates can also lead to qualifying issues. Your lender approves a monthly payment for you. When the letter says you qualify for $500,000 it is based on the rates available at the time of the letter. Most good loan officers build in a little cushion for minor rate variances. 1% is not minor. If you qualified for a max purchase price of of $500,000 at 3.5% with 20% down, then 4.5% will lower the amount of house you qualify for. That means you now only qualify for $443,750 with 20% down. Or you can buy the $500,000 dollar house but have to put more more than 20% down. The loan amount difference is $45,000 so that's how much more you have to put down to compensate for the rate difference.

This can be brutal when both rates and prices are rising. But once a buyer makes the purchase, they have their payment locked in and they begin to enjoy the market appreciation for themselves. Sitting on the fence is rarely a good idea, sometimes but rarely. 

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