Over the past decade, interest rates have been historically low, but are now starting to build back up. Right now, the interest rate for an FHA loan is at about 3.625%, which is a bit up from January, and significantly higher than last year.
The difference between interest rates
So, how does an increasing interest rate affect your buying power? Let’s consider how much home you can afford at different interest rates
In November of 2016, the 30-year FHA rate was at 3.25%. At this rate, if you wanted to buy a house, and pay no more than $1,200 a month for your mortgage (including taxes and insurance), you would have been able to afford a home worth about $218,000.
Now consider an interest rate of 3.75%, which about what you can expect now (depending on your credit score). The amount of home that you would be able to afford at $1,200 per month becomes substantially reduced to $205,000.
That is a difference in buying power of $13,000. In other words, the amount of home you can afford dropped by $13,000 with an interest rate increase of just 0.5%.
So, are higher interest rates “bad”?
Not necessarily, since higher interest rates also mean that you will earn more on your interest-bearing accounts (savings, money-market, investments, etc.). Higher interest rates also normally indicate a stronger economy, so your other assets (home, 401K, etc.) will be increasing in value faster than when rates were lower.
However, a higher interest rate means that buying a home will be more costly.
What this means for buyers
A 3.625% is still a phenomenally low interest rate, but rates are likely to steadily increase over time and the economy continues to improve. Additionally, significant increase in demand for housing in Utah is driving up home prices. Before you put an offer on a house, set a monthly payment at which you are comfortable, and then determine how much you can offer, based on the current interest rates. If you’ve been on the fence for a while, it may be wise to act now before higher interest rates/home values price you out of the market.
So, jump on the opportunity while the interest rates are still low, and give us a call for a free consultation to see how much home you can afford right now.
