As they have for the past year or two, rumors continue to swirl around about an impending interest rate increase. And although most of us cringe at the idea of higher interest rates, a Federal rate hike signifies that our economy is finally robust enough to endure one. When this interest rate uptick finally happens, how will this impact those applying for mortgage loans?
Since June of 2006, the Federal Open Market Committee (FOMC) has opted not to increase interest rates. This has been the single longest stretch within the last quarter century that interest rates have not seen any sort of upsurge. Interest rates have been at record lows from 2008 to the present to help stabilize our economy.
Banks look to the Federal Funds Rate to help determine their interest rates for all projects, including mortgages. At this point, early 2016 appears to be the soonest we will see interest rates rise but even then, mortgage interest rates will still remain low.
In 2006, the average rate for a 30 year, fixed rate mortgage was 6.41%. Since then, rates steadily declined through 2012, where they landed at 3.66%. In 2013, the yearly average went up slightly to 3.98% and 2014 saw another small increase to 4.17%. Year to date, the average rate is 3.83%, down a bit from 2014. During the early 2000s, the annual rate was about twice that, and in the 1990s, mortgage interest rates were between 7% and 10%. During the 1980s, those looking to finance a home purchase were looking at rates from 10% to almost 17%!
So, yes, interest rates are pretty certain to start creeping upwards but they will not get anywhere near double digit levels, or even close to the rates we experienced during the start of the 21st century. Overall, mortgage interest will continue to remain low and buying a home will still be financially feasible for many.
But on that note, as interest rates rise, even slightly, your buying power does decline. A one half percent increase will impact your monthly payment, the mortgage amount you qualify for and how much your mortgage will cost over the life of the loan.
For example, if you wish to borrow $800,000 at an interest rate of 3.92%, your 30 year fixed mortgage will cost you $1,361,706 and your monthly payment will be $3,783.
If interest rates increase by .5%, that same $800,000 will cost you $4,256 per month (an additional $473) and you will pay $1,531,996 over the 30-year life of your loan. That equates to $170,290 more you will pay your bank for your mortgage.
Those will adjustable rate mortgages shouldn’t worry too much about their interest rate suddenly skyrocketing but it might be a good time to investigate whether it makes sense to move to a 30 year fixed, if that is something you’re able to manage.
So, even though interest rates will remain at very low levels, any increase impacts your bottom line and your buying power. If you are looking to purchase a home in Los Altos, Menlo Park or anywhere in the Silicon Valley and can manage to do so before the FOMC decides it’s officially time to swing interest rates upward, that will definitely be in your favor.
Interested what interest rates have been since the 1970s? Freddie Mac has all the data available right here.