Last week’s Freddie Mac mortgage survey pegged the 30-year fixed mortgage rate at 5.21%, the highest since August of last year. While rates are still relatively low, the increases in the last few weeks will likely mark the end of record low rates.
The timing of the increases over the last couple weeks falls in line with the end of mortgage-backed security purchases by the Fed leaving the MBS market to stand on its own. This signals higher borrowing costs for investors, increasing the total cost of the home and decreasing monthly cash flow until rents start rising. In fact an increase of 1% on the interest rate of a mortgage can increase the total cost of a home by 19%. So while it’s expected that home prices could decline further nationwide with additional inventories hitting the market, the borrowing costs could affect the total investment even more.
Considering the fear that people had about rates skyrocketing when the Fed stopped MBS purchases, the damage looks to be pretty small at this point.
Let’s take a quick look at recent interest rate history:
As you can see rates on everything with the exception of the 1 Year ARM rate is trending up. If rates increase only another 12 basis points, we’ll be reaching levels unseen since 2008. This can have a serious impact on a property purchase. For example;
If you purchase an investment property for $100,000 and put down 20% on a traditional 30-year mortgage at 5.75% your monthly payment will be $466 (before taxes and insurance), and your total of payments will be $168,000 over the life of the loan.
Just 1% more and you monthly payment rises to $518 and your total of payments is near $187,000, a 19% increase in the cost of the home, meanwhile affecting your cash flow by $52 per month.
Take the same property but instead of buying it at $100,000, you decide to wait until the prices drop. The prices end up dropping another 6% and you get the house for $94,000, putting down the same 20% and financing $75,200. So by timing the market you scored an extra discount. Unfortunately rates went up to 6.75% and your monthly payment is $488 and your total of payments $175,500, actually adding nearly 8% to the total cost.
Pay attention to interest rates and if you’ve been waiting for that 2nd dip in prices, you should be running interest rate scenarios to see if it’s worth it. Rates might climb slowing after these initial increases but there’s no doubt the trend is higher.
Photo Credit: Mortgage News Daily