Interest rates have a huge effect on so much and many people say they “realize” that, but do they really understand the impact? Here’s a crazy scenario- If you can afford $100,000 house, at 5% interest, 30 year term, payment (excluding taxes, insurance) is $536.82/month. This is very affordable in today’s market. If interest rates were to go up (and in the past they have gone up 5-10 percent in one year), then here’s a scenario. In early 1982, interest rates were 12%. Using the same payment as above (because that is what the buyer can afford), we plug those numbers back in with 12% interest, 30 year term and WHOA MOMMA! Our buyer can now only afford a $52,188 house based on the same payment. What this means is: if interest rates were to go up drastically, the first time home buyer group (biggest group of buyers out there) would afford much less in a home, as well as any other buyer getting financing. This would create a market where homes would have to drop significantly to be competitive with current buyers. In some cases, $30-40,000. And, those same buyers wouldn’t be able to get a 3 bedroom, 2 bath home. They could only afford 2 bedrooms and 1 bath at the higer rate. So, if you are a buyer, relish the great interest rate and the bigger home you can afford. IF you are a seller, be happy with interest rates even if it is taking a little longer to sell, it could be much worse!
Tags: Interest Rates
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