by Rick Fitgerald, Alerus Mortgage
It was inevitable.
We knew that the Federal Reserve could not keep rates the Federal Funds at ZERO percent. And the ¼% rate increase last week was a clear sign that the Fed believes we are a strong and growing economy.
So, what does rising interest rates mean for you as a buyer? You will have a higher monthly payment or diminished purchasing power.
First, take a look at the numbers if you have an increased payment:
Assume you finance $300,000 in today’s current market for an owner occupied 30 year fixed rate at 3.875%. Your monthly principal and interest payment is $1410.71 per month.
Assume the same amount financed at 4.875% – just a 1% increase in rates. Your monthly principal and interest payment is $1587.62.
This is an increase of $177 per month, an extra $2,124 per year, or an additional $63,720 over the life of the loan.
What does a 1% increase mean to your purchasing power?
Assume you want to keep your monthly principal and interest payment at $1410 per month – which is what you can obtain in the current market. Again, assume a 1% increase in interest rates to 4.875%. Your loan amount is reduced to $266,569 – a decrease in purchasing power of $33,430!
I cannot predict the future but I do believe rates are moving up. Seeing rates in the high 4 percent range (4.75% -5%) in the next 12-18 months is not out of the question. We have been having solid job growth of $200,000+ per month. More people working means more people have money to spend. Spending causes inflation – and it is the Federal Reserve’s mandate to control inflation.
As you can see – rising rates increase the monthly payment or reduce potential homeowner’s purchasing power. This could eliminate some buyers from purchasing and keep them renting. An already tight condominium market for renters could get tighter.
Are you considering an investment in rental property? Rates are still historically low. As indicated in the numbers above the cash flow benefits from an investment property or purchasing power you can obtain in the current market will change with rising rates. Take advantage of the market now. If you would like to discuss details for a property purchase we are here to help.
Rick FitzGerald, Mortgage Banker, Alerus Mortgage