Common sense seems to imply that the purchase price for a home may be the biggest determining factor in whether or not you can afford it. However, there is another important element to consider, and it’s one that can have a significant impact on your bank account. Drumroll, please…it’s the interest rate! Let’s take a closer look at the impact interest rates can have on your finances.
Each day, in fact each second, can reveal changes to the interest rate for a home loan. Lenders try not to change the rates that often, but they are actually constantly changing. That means the timing of your home purchase determines a lot about the interest rate you will get. If rates are generally around 5%, you’ll pay about 5%. If you buy at a different time, when rates are near 3.5%, you’ll likely get a rate in that general area and save quite a bit on your mortgage payment each month.
Let’s say you have about $2,500 per month that you feel comfortable using to pay your mortgage:
- At a 4.00% interest rate, $2,500/month will buy a $465,500 home.
- If the rate is at 5.00%, $2,500/month will buy a $410,000 home.
Wow! That rate increase of 1.00% reduced your purchasing power by over $50,000.
If you still want to buy that $465,500 home at the 5% interest rate, your mortgage would be approximately $2,782/month. That’s almost $300.00 more per month than the 4% rate!
Therefore, we can see that a rate increase of 1.00% can have a drastic effect on affordability.
Let’s now say that you bought that $465,000 home at a 5% decrease in price – that would equal a purchase price of $442,225.
- At the current 4.00% interest rate, you would pay about $2,387/month.
- However, if the interest rate increased to 5.00%, that reduced purchased price would cost you about $2,655/month.
As you can see, even with a reduced price, an increased rate can lead to much higher monthly payments.
Assuming: VA Fixed Rate 30 Year mortgage with 100% Financing, 2.15% Funding Fee, and $230 monthly Tax & Insurance
What’s expected to happen to both interest rates and home prices?
Right now, short term “Fed Funds” rates, set by the Federal Reserve, are already at 0.00%, so they can’t go lower. The Fed is currently buying a large volume of mortgages daily to help keep those rates down too. However, they have announced that they will be cutting back on the buying of mortgages, which will likely increase mortgage rates over the long run.
What is the general home price consensus for the future?
According to the following excerpts from a Honolulu Magazine July 2013 article about Hawaii real estate trends, supply and demand has fueled the current rise in median sale prices, and Hawaii home buying is an opportunity to seize upon:
- In the past year alone, the median sales price has gone up 4.2 percent for single family homes and 5 percent for condos. Not a bad investment strategy, especially when the economy as a whole has seen its share of ups and downs.
- According to the Honolulu Board of Realtors, the current median price for a single-family home in Honolulu is $625,000 (a condo is $335,000). Economist Paul Brewbaker says don’t be surprised if that number morphs into $1 million before the decade is over.
- Basically, all that ever-growing numbers of home buyers can do now is try to grab an existing home when someone decides to sell. So far this year, we’ve seen an average of 356 single-family homes and 521 condos come up for sale each month, a drop of 27.2 percent in inventory of single family homes, and 21.4 percent in condo inventory from 10 years ago.
- If prices are consistently on the rise, and seller is king, where does that leave you if you’re trying to buy? Not in a bad place, actually, if you act quickly. “This is actually a good time for buyers as well,” Gregson says. “The inventory may be low, which is nudging prices upward, but interest rates are also low, which works in the buyer’s interest.”
- “Things aren’t going to get more affordable in Hawaii,” says Miyama who advises getting a foot in the door. “Start somewhere and build a financial foundation, build equity.”