Mortgage Interest Rate Rises: First Time Homebuyer Concerns

Buying a home for the first time is a very exciting journey! One of the first things that a prospective homebuyer will likely do is start by looking online at listings in the area that you want to live, if you’ve living in Los Angeles and looking to buy on the Westside, you might search for properties located in Santa Monica, Westwood, Culver City, or Beverly Hills, and once you’ve selected your area of preference, you would enter your price range.  Additionally, if you’re looking to get a mortgage like most first time home buyers, your monthly payment will dictate how much can you afford and the price of the home you need to look for.  (For more information on this, please read my previous blog about how much home you can afford.)

Most lenders will use the 28% rule, which means that of your annual gross income, 28% is the maximum payment that you should pay towards your mortgage.  As an example, suppose your annual household income is $100,000.  Using the standard 28% rule, that will give you $28,000 of available annual payments for your mortgage, and divided by 12 months equates to $2,333 of your maximum mortgage monthly payments.  Assuming there’s a 4% fixed interest rate for 30 years and that you have saved up diligently so that 20% down payment is available, your home wouldn’t have to be more than $480,000 for a $2,330 monthly mortgage payment, which includes principal, interest, and property taxes (estimated at 1.25%).

But remember, this example could easily change with the Federal Reserve wanting to raise the federal funds target rate.  That would increase mortgage rates.  Using the same example but with a 1% higher rate of 5% as compared to the 4% rate used in the example, your monthly mortgage payments would now increase to $2,561 as compared to $2,330. (Remember that a 5% rate is still within the historical average.)  That’s already $231 over your recommended budget! Although some lenders would likely consider other factors that might make you qualify for the loan, that single percentage cost you more than $2,772 per year and more than $83,160 over the 30 year loan.

The reality is that later this week (September 16th and 17th) the Federal Reserve has a meeting and interest rate decisions are the spotlight.  Predictions are mixed among analysts with some expecting the Federal Reserve to hold off until early next year while others are expecting a raise now.  The expected increase is 25 basis points or ¼ of a percentage.  Either way, it looks like it won’t be long before the rates start climbing back up again, with former Treasury Secretary Lawrence Summer being a strong supporter of an increase now.  The 2016 mortgage rate forecast by Fannie and Freddie Mae is around 4.4% to 4.6%; the Mortgage Banker Association has it at 5.2%; and the National Association of Realtors forecasts are as high as 6.0%.

Right now homebuyers are able to consider properties at higher price ranges due to the low interest rates, which will change after the rates goes up.  Should you need any further information in this regard, please feel free to reach out to PSL Realty at any time at 424.333.0557 or plissia@pslrealty.com.

Paolo Lissia

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