Yes the interest rates ticked up today, so what? Well it is more than "so what" to buyers. For most people interest rates rising tend to be a good thing. Today rising interest rates often means that the economy is recovering, people on fixed retirement incomes are getting a little more from their savings our retirement funds are increasing. These are all good things.
Reduction In Purchasing Power
In real estate rising interest rates are not necessarily good things. When interest rates tick up, a buyer's purchasing power ticks down. When interest rates tick up, the number of people who could afford to buy your home ticks down. Whether you are buying or selling, these are not positive events.
You may be asking yourself what is the impact of an interest rate increase of an 1/8%? Let's take a look. For this example we are going to assume a 30 year mortgage at a current rate of 4.5%. In this case the maximum loan amount is based on the monthly payment this person can afford. In the table below you will see several columns: Maximum Qualified Loan Amount (MQLA), Monthly Payment (MP), Interest Rate Increase (IRI), and New Qualified Loan Amount (NQLA).
Disclaimer: I am not a lender. These are based on the assumption that the buyer can afford the monthly payment and no more. That same payment would now qualify them for a different amount based on the interest rate change.
Rule of Thumb
You can see that a .5% increase has a pretty dramatic impact. For a rule of thumb you can easily use the following:
For every 0.125% (1/8th of a percent) increase in the interest rate you can estimate that the buyer is now qualified for a loan that is 1.375% less.
You can see this holds true in the table above. You are looking at an increase of 0.5% (4/8ths) and that would mean that the decrease should be 5.5% (4 * 1.375.) Remember these are estimates and they are very close.
Is it possible that by the end of the year we will be over 5%? Many people think so. Last April the rate was 3.45% and today they are hovering aroung 4.5% less than a year later. That means if you put off buying a home last April and started to look again this year you would not qualify for as large a loan (and therefore not as large a home.) In addition, in Frisco Texas and many other places home prices have risen.
You may now be asking yourself when is the best timeto get into this market. The answer is now. If you wait, you may miss the market entirely. More people think that interest rates will continue to rise. If the econaomy continues to improve, interest rates will rise and house prices will rise as well.
If you are looking to buy or sell a home in the North Texas marketplace and especially within Collin and Denton Counties, come find out what all my clients have found out: when you work with me—Your Success is My Focus.