According to the Lawrence Yun, NAR Chief Economist, interest rates will have to rise from the low 3.75% interest rate that we now see for most mortgage products.
He indicates that rates will likely cross over the 5% threshold sometime in 2015. Rates could be near 6% by 2016.
The rising rates will shrink the purchase price that buyers can afford. For instance, a buyer looking at a $300,000 loan will have a monthly loan cost of $1,389 per month at today's interest rate but that same money will cost them $1798 per month at 6%.
Here's how that breaks down:
Should rates rise to 4%, the buyers loan amount is reduced from $300,000 to $289,000. If rates push up to 5%, that same buyer will see their price range shrink further to a new loan amount of $258,000. At 6%, their loan amount is further reduced to $230,000--more than a $70,000 difference.
Should rates rise to 4%, the buyers loan amount is reduced from $300,000 to $289,000. If rates push up to 5%, that same buyer will see their price range shrink further to a new loan amount of $258,000. At 6%, their loan amount is further reduced to $230,000--more than a $70,000 difference.
What could this actually mean for a buyer waiting to purchase?
As interest rates rise, the affordability index changes. Waiting to purchase may cost the buyer more than the just purchase price range. Buyers may lose some of the "wants" and "needs" in the process.
Buyers will qualify to purchase in lower price ranges which could mean the difference between purchasing a three bedroom home with a garage to being only able to purchase a two bedroom home without a garage.
Buyers will qualify to purchase in lower price ranges which could mean the difference between purchasing a three bedroom home with a garage to being only able to purchase a two bedroom home without a garage.
