Many persons interested in buying a home seem not to be in any rush. They are betting that prices will fall further, and that interest rates will remain low. But what happens if rates rise? They have in the past, and the government is now in a position it will have to borrow money to pay for all the spending. How do they do that? They have to make their interest rates attractive to investors. If you have been paying attention to the world markets the dollar is falling, and may no longer be the currency of choice for safety and trade. In the last week or so, Australiaraised it's interest rates and it sent panic into the financial markets. This week it was Norway that raised their rates. This will set off fear in governments around the world. They are all in the same boat financially as we are in the USA. They will also need to attract investors in their bonds, and may want to do so when they can still afford it. As more countries start raising their interest rates for investments, the quicker they will rise as the next nation has to top the previous offering of other countries now paying lower rates. There is no magic here. So shortly we may see other nations start to raise their rates. At that point, the USA will have no choice but to follow. When that happens, a rise in mortgage rates can move even affordable homes beyond the reach and qualifications of many. It can also happen very quickly leaving many would be home owners standing on the sidelines. and their only option is to rent!
The cost to borrow mortgage money even with modest rate increases will increase dramatically. An increase in the the 30 year fixed rate mortgage at 4.5% Principle and Interest (PI) at $1013 / month will rise to $1330 PI / month for a 7% That is an increase of mortgage of $317 PI / month! When you think about it in the 1980's when the markets were not as severe as this one, mortgage rates rose over 7% in less than 7 months. I personally signed on a home at 9.5% in december, and by June 81' the rate was 15.5% - the PITI of a 70K loan was over $1500 / Month!
When you amortize $200,000 borrowed a the different interest rates things change even more dramatically. One of the costs of money, is how long it is borrowed for. So the borrower also has to look at not just the monthly payment, but what about the increased costs of that higher monthly payment over the 30 years term of the mortgage. The Amortization of $200,000.00 spread over 30 years from mortgage rates that start at 4.5% and rise to 7% rises $164,529.87 more interest paid at the 7% loan vs. the 4.5% 30 year fixed rate.
James Crawford ABR, Broker Associate
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