What happens if Interest rates rise?

    What happens if interest rate rise?

    By Brandon Brittingham

    443-339-9200

     

    what if interest rates rise?

     

     

    Many financial analysts are predicting that interest rates could rise as early as June 2015.  Let’s examine how even a slight increase in rates could significantly increase your monthly mortgage payment.

     

    Suppose you were to borrow $120 thousand today at 4.0%. Assuming you took a standard 30-year fixed-rate loan, your monthly payment for principal and interest would total 572.90. Now, let’s imagine that you waited to purchase and that the interest rate had jumped to 4.5%. Your payment would now be $608.02, an increase of $35.12, 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.

     

    Amount Borrowed Interest Rate Monthly Payment Total of Payments after 7 Years Increase in Total Payments Compared to Total at 4% Rate
    $120,000 4.0% $572.90 $48,124
    4.5% $608.02 $51,074 $2,950
    5.0% $644.19 $54,112 $5,988
    5.5% $681.35 $57,233 $9,109

     

    Now lets 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 the house you intend to buy costs $150,000, has three bedrooms, and offers 1,600 square feet of living space. Based upon a down payment of $30,000 and an interest rate of 4%, your regular payment of $572.90 would purchase the house at a monthly cost of $0.36 per square foot. ($572.90 divided by 1,600). But, as you’ll see below, if you were to purchase the same house at a 5% interest rate, you would need to pay $644.19 per month or $0.40 per square foot.

     

    Amount Borrowed Interest Rate Cost per Square Footof 1,600-sq.-ft House Described Above.
    $120,000 4.0% $0.36
    4.5% $0.38
    5.0% $0.40
    5.5% $0.42

     

    Now, step two. Let’s examine how much square footage you would be able to purchase at higher interest rates while still paying the same monthly payment that you would have paid if you had purchased earlier at a rate of  4%.

     

    Desired Monthly Payment Interest Rate Square Footage You Are Able to Purchase(based on unit costs of theoretical house described earlier) Square Footage Lost
    $572.90 4.0% 1,600
    4.5% 1,507 93
    5.0% 1,432 168
    5.5% 1,364 236

     

    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 168 square feet, for example, could noticeably reduce the size of a home’s kitchen and eating area.

     

      The bottom line: With interest rates ready to climb, waiting to purchase (even waiting just a few months) will likely cost you money or space.

     

     

    Brandon Brittingham

    The Maryland and Delaware Group of Long & Foster

    1405 S. Salisbury Blvd., # 102, Salisbury, Md.

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