Does a small increase in interest rate really matter?
This is a fair question. The Fed recently raised the rate for the first time since the financial crisis. The raise was only a .25% so what is the big deal?
Well, the Vice Chair of the Fed stated that 4 rate increases would be “in the ballpark” and the article also analyzed the Fed’s projections and predicted a quarter point increase each time. That would mean a full 1% increase in 2016.
Let’s just look at simple numbers to make the calculations easy to illustrate.
Today’s rate for a 30 year fixed is 4.1% with a large lender.
If a buyer were to get a loan of $800,000 to buy a median priced home in Santa Clara County ($1,000,000), over those 30 years, the total interest paid over the life of that loan will be $591,611.
At 5.1% the total interest paid will be $763,695.
The difference due to that 1% increase will be $172,084 for the life of that loan. Yes, nearly enough to cover the down payment.
This will help explain why buyers are out there now gobbling up properties in Silicon Valley so that they can lock in their historically low interest rates, and also why we are seeing an inventory shortage and have been for a while.
So does a small increase in interest rate really matter? I think the answer is self evident. Movements in interest rates DO MATTER. The real question is: Does it matter to you?