What Happens to Your buying Power When the Interest Rates Rise?

Where are the interest rates going to do in the future?

A look into the crystal ball.........

Let me give you some insights as to what the real estate field is hearing.
Currently interest rates are hovering in the low 5% range.

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In a recent article written by Michael Pollick of the Sarasota Herald-Tribune dated March 30, 2010,   Michael wrote,

” Signs are pointing to the end of the era of 5 percent mortgages, one that already has lasted longer than most thought it would. It is clear that the combination play used by the government and Federal Reserve to stimulate the residential real estate market in 2009 and 2010 -- artificially cheap mortgage rates coupled with lucrative federal tax credits and easily available Federal Housing Administration loans -- is winding down. The government and the central bank are intent on unwinding their involvement in the mortgage-backed securities market. The Fed, which has accumulated a trillion-dollar portfolio of mortgage-backed securities, plans to stop buying any more this week.”…….to read the complete article click onto Sarasota-Herald Tribune

At the end of April, when the government does not buy back the loans, you will see the interest rates start to jump. Usually after an extended time of interest being low when the interest rates start to climb upward they historically jump quickly and severely. The experts predict that rates will move 1% possibly 2% by the end of the year.

What does this mean to both a buyer and a seller?

Let us take a traditional mortgage and run it through the calculator so that I can demonstrate my point.

Let’s take a payment on a $200,000 loan for 30 years fixed at 5%
What is the month payment of interest and principal?      $1,073.

O.K. so we want to look and see what happens to our borrowing power when the interest rate goes up. So here is our scenario, your budget is $1,073. a month for a payment.
If the interest rate goes up - how much house can I now afford at that same monthly payment?

Here is the payment chart:

$200,000 at     5.0%    for 30 years is   $1,073
$190,000 at     5.5%    for 30 years is   $1,078
$180,000 at     6.0%    for 30 years is   $1,079
$170,000 at     6.5%    for 30 years is   $1,074
$160,000 at     7.0%     for 30 years is $1,064

Same Payment, but different size house! A 1% interest rate increase is equivalent to a 10% decrease of today’s purchasing power.

If you are waiting for prices to drop further and you are going to finance your purchase you may want to consider making a move while the interest rates are low.

Visit Sarasota Real Estate to start your search for a home in sunny Sarasota, Florida. If I you have any questions please call me, Sara at (941) 586-4790 or email SaraLeicht@MichaelSaunders.com

Posted by Sara Leicht - SaraSellsSarasota.com on April 9th, 2010

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