Mortgage Rate Increases

Mortgage rate increases have been predicted to rise for some time now, and we’ve finally seen a notable change. (Photo: Shutterstock)

Suzanne Plewes, RE/MAX Alliance in Loveland

Suzanne Plewes, RE/MAX Alliance in Loveland

LOVELAND – Mortgage rate increases have been predicted to rise for some time now, and we’ve finally seen a notable change. According to Realtor.com,
rates are currently the highest they have been in four years! What does this mean for home buyers?

Reduced buying power
Higher interest rates mean that buyers will qualify for less when it comes to purchasing a home. Mortgage pre-approvals are based on what buyers can afford monthly. When interest rates rise, corresponding monthly payments for those mortgages rise as well. Thus, buyers who are purchasing at their maximum price range will need to make adjustments.

Here’s a look at what even a slight change can do to buying power. Let’s assume that a buyer is pre-approved to purchase a $400,000 home based on a 4% interest rate and 5% down payment. This means the loan amount would be $380,000 and the principal and interest payment would be roughly $1,814 per month.

The average mortgage interest rate as of February 15th was 4.38%. In order to keep the same monthly payment, that same buyer must purchase a home for a max of $382,250. Thus, his/her buying power dropped by almost $18,000. As you can imagine, this eliminates some homes as options for this buyer.

Continued increases in interest rates
Interest rates are expected to increase further this year. So, buyers who’d like to purchase a home would be better off acting quickly. When rates rise, home prices will eventually fall, but this takes a long time to adjust. In the short term, both home prices and interest rates will likely rise.

Staying educated
As illustrated by the monthly payment example above, home buyers must be aware of fluctuations in interest rate. Otherwise, you might accidentally make an offer on a home that is no longer affordable! Before submitting offers on any homes, it’s a good idea to call your lender for an update on interest rates and your pre-approval.

By Suzanne Plewes, RE/MAX Alliance in Loveland . Suzanne is a broker associate at RE/MAX Alliance. Write to 750 W. Eisenhower Blvd., Loveland, CO 80537, call 970.290.0373 or e-mail suzanneplewes@remax.net.