It’s no secret that current mortgage interest rates are important to home buyers when they are considering purchasing a home. The interest rate for home loans impacts affordability for the home buyer, and rising rates can cool housing markets as buyer excitement and affordability wanes.
After years of historically low interest rates, rates have started to creep up in the last several months.
So why are interest rates increasing and what can we expect with regard to rates in the coming months?
The Federal Reserve, usually called the Fed, is the central bank of the United States. They seek to influence and regulate our economy through monetary policy. They don’t directly set the interest rates for things like credit cards, home loans, and car loans, however they do set a benchmark rate and banks use that benchmark rate, in conjunction with investor demand for U.S. Treasury notes and bonds, and competitive market forces, to set their own interest rates.
After the Great Recession, the Fed lowered interest rates to very low levels in an effort to stimulate the economy and help consumers. Now that we have had several years of low unemployment, high stock market yields, and key market indicators show our economy is strong, the Fed has begun to raise rates to curb inflation.
We have had two interest rate increases so far in 2018, and the indication from the last meeting of the Fed is that it is likely we can expect two more rate increases in September and December of this year.
According to the New York Times, the Fed indicated they will continue to gradually push up interest rates, although they are concerned and watching for possible economic fall out from tariffs and trade disputes. It may be that rate hikes could be put on hold if the economy starts to flag.
According to Ian Bennett with Elevations Credit Union, today’s mortgage interest rate, for a 30-year conventional fixed loan, for a borrower with 20% down, is 4.625%. That is up about half of a point from the beginning of the year.
So what will it mean for consumers if rates continue rising?
Here are some numbers showing how interest rate increases impact affordability.
Purchasing a $500,000 home with a conventional mortgage, the monthly payments look like this:
The monthly payment on a 20% down conventional loan with an interest rate of 4.5% comes in around $2,689.
The monthly payment on a 20% down conventional loan with an interest rate of 5% comes in around $2,810.
The monthly payment on a 20% down conventional loan with an interest rate of 5.5% comes in at around $2,934.
Although the increases in monthly payment may not seem terribly impactful, they can play a significant role in how they affect the real estate market.
1. Since higher interest rates affect affordability, as the rates go up, buyers can afford less and less house. They get less bang for their buck. This could work to slow the rate at which properties can appreciate.
2. Many people, investors and regular home owners alike, look at real estate as an investment. Since the beginning of the economic recovery, real estate has been one of the highest returning investments available to most people. As interest rates rise, it makes real estate a less enticing investment vehicle, and that could lower demand.
3. As buyers start paying higher and higher interest rates, that eats up a larger chunk of their income on a monthly basis. Home owners will be able put away less savings which could delay their ability to make their next purchase or make updates to their home.
We will have to wait and see how the rate increases impact our market. You can bet we will be watching. As always, if you have more questions, don’t hesitate to reach out! Until next time!
Allison and Ken