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What Do Higher Rates Mean?

Reblogger
Real Estate Agent with RE/MAX Executive

This is definitely something to keep in mind. Interest rates have started to rise as home sales have increased, which is not surprising. Interest rate increases of only 1% can make a big difference in your monthly payment. If you are thinking about buying, even in the next year or so, it may be a good idea to talk to a mortgage lender and get yourself pre-qualified. There are some programs available where you need a minimal downpayment and not perfect credit so you may be able to buy sooner than you think. The stability and steady payment alone is worth the investment in homeownership - no landlord to raise your rent every year or make you move!

Original content by Bob Caldwell

From the Desk of Bob Caldwell

What Do Higher Rates Mean?

We do not mean to beat a dead horse here; however the topic of higher interest rates seems to be dominating the headlines of the financial world. While these articles dissect the possible effects of higher rates on the stock markets, business performance and more, the question we would like to focus upon is -- how do higher rates affect the average individual? There is no doubt that these rates may make home and car financing more expensive -- but by how much? As of recently, rates have risen a little more than .50% from rock bottom record lows -- depending upon the date we take a reading. What does one-half of one percent cost? Using a base of $100,000, this would raise the cost of owning a home by approximately $42.00 per month. If one were financing $300,000, then the additional cost would be $125 per month. These numbers are presented before the effect of taxes is taken into account. Most homeowners can deduct the cost of interest. In this case we will assume a tax bracket of 25%, which would lower the cost of the increase to around $94.00 per month.

Another effect of the higher payment would be qualification for the home loan. Lenders limit qualification to a certain amount of one's monthly income. That ratio will vary widely based upon the details of the transaction and type of loan -- amount of downpayment, credit score, etc. However; assuming that the person is already at the "limits" of qualification, then the $125 per month would lower the qualification by approximately $25,000 of the total loan amount. This entire analysis is truly an oversimplification, yet it is important to analyze. Homes have been as affordable as they have ever been and a half-of-one percent change will not change that. Keep in mind that we still are not predicting the future of rates. Finally, what about car loans? The change in the cost of owning a car would be much, much less than owning a home. This is because car loans are much smaller than home loans, they are based upon shorter term rates which have not changed as much and are many times offered at discounts as low as 0% in new car promotions. The conclusion? At today's rates, purchasing a car or a home is still a bargain. But depending upon the future of rates, the bargain may not last forever.

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"From the Desk of Bob Caldwell" Blog, Copyright 2013 Bob Caldwell

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Comments (1)

Li Read
Sea to Sky Premier Properties (Salt Spring) - Salt Spring Island, BC
Caring expertise...knowledge for you!

Good reblog...important information, here.

Jun 26, 2013 02:23 AM