What a Difference a Point Makes

On the heels of the Federal Reserve’s most recent rate hike, which takes its key rate to the highest it has been since the housing crisis, it’s important to understand its likely impact on mortgage rates and on your buying power if you are in the market for a new home.

But before panicking, be aware that mortgage interest rates won’t necessarily react immediately to this week’s news. The Fed controls the short-term rates which typically have a longer term impact on mortgage rates. Plus, the recent rate hike by the Feds has already been at least partially baked into today’s interest rates, which are a good point higher than they were a year and a half ago (hovering around 4.5% versus 3.5%). Still, experts believe that mortgage rates could be a good deal higher by the end of 2018, falling anywhere from 4.7 to 5.9% (source: Realtor.com).

If you’ve been searching for the perfect home on the Cape for more than a year, not only are you impacted by rising prices (largely due to inventory shortage), but if you are planning to take out a mortgage, your buying power may be impacted by the slow but continual rise in mortgage interest rates.

Consider a buyer who eighteen months ago was approved for a $500,000 mortgage at 3.5%. Her monthly payment (principle and interest only) would have been $2245. Today, with interest rates hovering around 4.5, that same monthly payment will only get her a $445,000 mortgage – more than 10% less than what she could have afforded 18 months ago. This might be OK if sale prices were falling, but they are not. They are slowly rising, along with interest rates. If she doesn’t find the perfect house until the end of the year, and if rates are at 5% by then, her $2245 monthly payment will only support a $420,000 mortgage. With prices slowly rising at the same time, that buys you less house than today’s $445,000 and a LOT less than $500,000 from 18 months ago.

This is not to suggest that you should buy the wrong house simply to buy it quickly. But when you are shopping for homes and weighing the pros and cons of each, be sure to factor in the effect of rising prices and interest rates, the longer you wait. You may pass up an ALMOST perfect home today and have to settle for even less by the end of the year. When searching for a Cape Cod home, be sure you are considering ALL your options and carefully weighing the impact of acting vs. waiting.

For professional assistance buying your Cape Cod home, please contact me and be sure you are signed up to receive Daily Property Alerts which email all the latest listings to your mailbox each day. We can’t change today’s inventory, but we can help ensure you are not missing new listings when they hit the market. Contact me today to get started. It would be my privilege to assist you.