By Brandon Brittingham
Many financial analysts are predicting that the Federal Reserve will raise interest rates three or four times in 2018 with the first increase coming in March! Let’s examine how even a slight increase in rates could significantly increase your monthly mortgage payment.
Suppose you want to purchase a 1,600-square-foot house for $180,000. You intend to put $18,000 down and borrow $162,000 at 4.5%. Assuming you took a standard 30-year fixed-rate loan, your monthly payment for principal and interest would total $820.83.
Now, let’s imagine that you waited to purchase and that the interest rate had jumped to 5.0%. Your payment would now be $869.65, an increase of $48.82, presumably to purchase the same house. The table below shows further monthly increases as the interest rate climbs. You’ll also see that, over time, a slight monthly increase can really add up.
Now let’s explore how a rising interest rate can affect the size of the house you are able to purchase. First, we’ll look at how interest rates affect a home’s cost per square foot.
Suppose you wish to buy the same 1,600-sq.-ft. house described earlier. As shown below, based upon a down payment of $18,000 and an interest rate of 4.5%, your regular payment of $820.83 would purchase the house at a monthly cost of $0.513 per square foot. ($820.83 divided by 1,600). But if you were to purchase the same house at a 5% interest rate, you would need to pay $869.95 per month or $0.543 per square foot.
Now, step two. Let’s examine how much square footage you would be able to purchase at the 5% interest rate while still paying the same monthly payment that you would have paid if you had purchased earlier at a rate of 4.5%. (We’ll divide the cost per square foot at 5% into the desired monthly payment to determine the amount of square feet the payment would purchase.)
As interest rates increased, you were able to purchase less house. In the real world, you would have to compromise and choose a house with less square footage, and your loss of space might be significant. A loss of 89 square feet, for example, could noticeably reduce the size of a home’s kitchen and eating area.
For step three, let’s imagine that housing prices rose 2% and interest rates increased to 5.0%, but you still wished to pay about $821 per month. How much square footage could you purchase then? We’ll start with the assumption that the desired payment of $820.83 originally purchased 1,600 square feet. In our theoretical example below, the same payment would purchase only 1,480 square feet, a loss equal to the area of a medium-sized bedroom. (Our figures assume a new cost of $0.554 per square foot vs. an original cost of $0.513.)
Don’t risk your dreams to climbing prices and interest rates. Call me today so that I can help you get the most for your money––and the most space for your family!
The Maryland and Delaware Group of Long & Foster
107 Williamsport Circle
Salisbury, MD 21804