They say that buyers buy when rates go up...

Did you know that we tend to buy stock when the stocks are going up? and we tend to buy houses when interest rates are rising? I guess that is because we are always trying to catch the best possible deals before they rise any higher. Well, rates are going up again. 


The funny thing about Real Estate at this point in time is that while home prices in Austin may only change 5-10% over the next 12-18 months, with interest rates at the lowest points that they have been in almost 25 years, every 1 point change in the interest rate will affect a new home purchase value/mortgage by approximately 10%. So, even if home prices stay the same, when rates go from 4% to ~ 4.5%, that 1/2 point change in the rate shifts new home purchase values in Austin by around 5%. Really. This is not funny math. Find a good mortgage calculator and model the numbers yourself or look at my abstract model below.


So, here is the reality of where we have been recently and where we seem to be going. If rates continue to do what the analysts believe is happening, we could see rates back up around the average rate over the past 10-15 years, which would put us up around 6.5 - 7.5%. That is a shift of ~20-30% in home purchase values and monthly mortgages. Even at 5.25% rate, which is where we were earlier this year, we end up with about a 10% shift in home value/mortgage over where we have been this week. So, a 6% - 7% interest rate is still a great rate, but where we are right now is still unbelievably low, low, low. The truth is, many of us may never see rates this low again in our life time.


[Practical Application Below in round numbers]:

• Estimated model broken into $100,000 mortgage values 


• (You can use $100k as a multiplier for your own mortgage value)


• $100,000 at 4% interest would be $477 a month (Principle and Interest only)


• $100,000 at 5% interest would be $536 a month (more than 10% shift in value)


• $100,000 at 6% interest would be $600 a month (simple interest; 30 year fixed mortgage) 

• If you are financing a $400,000 mortgage, a 2 point shift in interest would impact your monthly payments by almost $500 a month which is a huge shift in home value.


• Looking at it strictly from payments, a 2 point shift in rates would increase your payments on a $400,000 mortgage by approximately $6,000 a year. 

Could you think of a better use of $6,000 a year for the next 10 years?


(Please note: this is not a mortgage calculator! This is not an offer or a loan at any rate. This article was written to explain what happens to mortgage payments when small changes in interest rates occur. If you want to know more about your particular needs, or want to talk to a mortgage broker--call me. I would be happy to put you in touch with experienced and qualified lenders to discuss your specific needs. If you would like to talk about specific homes, communities, or your Real Estate needs--call me. I would be happy to talk to help you in your specific Real Estate needs). 


tim.thornton@ziprealty.com
512.914.4665

Video: Top 10 Things you should know Before you buy Your Next Home

  

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