Interest Rate Increase is More Than a Baby Bump

     The big news in the housing market came from Washington, D.C. this week. According to the Federal Housing Finance Agency, interest rates jumped up almost half a percentage point from approximately 3.5 to 4.0 percent for a 30-year fixed rate mortgage, creating a scramble to buy up existing inventory before rates rise even further. The almost half point bump, the largest bump on record within a three-week period, has created significant fears of continued rate increases, propelling buyers who have previously been sitting on the fence to make a purchase now. The .5 point rise diminishes home buying power. For example, a $300,000 mortgage at 3.5 % has a monthly principal and interest payment of $1,347.13 while a 4% rate increases the monthly payment by $85.11 which means that a buyer needs to make an additional four times that amount, or $340, to qualify for the same $300,000 home. If rates increase from 3.5% to 4.5%, the payment will increase by $172.92 which diminishes buying power even more.

     We’ve known for quite some time that historic low interest rates, the lowest being 3.35% six months ago, can’t last forever. Smart buyers buy when prices and rates are low. Unfortunately, most of us never know when the bottom of the market occurs. We only know that in hindsight and so that time has already passed and for those of us who missed it, we can let out a big groan. The lowest 30-year interest rate occurred in December 2012 when the rate was 3.35 and the average sales price in Anchorage was $331,997 for single family homes. The average sales price for April 2013 was $338,065, another creep upward.

     But the price of a home is much less important than the interest rate paid over 30 years. Interest on a fully amortized 30-year loan for $300,000 at 3.5% is $184,968.26. An increase of 0.5% annual interest rate would be an additional $30,640.26 over the lifetime of a loan. That’s why it is ridiculous for buyers to quibble over a $1,000 counteroffer or even $10,000. Offers from buyers that fall apart over a few thousand dollars in a seller’s counter aren’t receiving good advice from their selling realtors and buyers aren’t seeing the forest for the trees. An interest rate bump of 1% costs a lot more than a loss of $5,000 in closing costs paid by the seller or a slightly higher sales price. In the long run, a lower rate of interest rules over purchase price every time.

     In the coming months, it might be well worth it to pay to lock or buy down your interest rate, particularly if you’re purchasing a new construction home which might be four to six months before completion.