While the news media focuses on The Federal Reserve’s decision not to raise short term interest rates, mortgage interest rates have risen from 6.0% to 6.625% in the past 6 weeks. That translates to buyers losing approximately 7% in their buying power. Or, to look at it another way, sellers stand to lose 7% in their selling power.
This move in mortgage rates forces more buyers out of the market and is one of the reason’s pricing a home today if very challenging and certainly is not a static event.
Let’s use an example of a $300,000 home where the buyer might try to purchase with 5% down.
Purchase Price:Â $300,000
Down Payment: Â $15,000
Mortgage Amount: $285,000
Monthly payment for principal and interest at:
6% = $1,708.72
6.625% = $1,824.89
The difference is $116.17 per month in principal and interest or $1,394.04 per year. That’s an increase of 6.8%. Few people in the U.S. buy a home based upon it’s price. It’s all about the monthly payment and because mortgage rates have moved up, as of today, it will cost buyers 6.8% more to buy that same $300,000 home that they could have purchased 6 weeks ago.
Given that we remain in a strong buyers market, the sellers will need to compensate for this present interest rate environment.
If you’d like to run the numbers, I found an excellent site with all kinds of mortgage calculators here.