Changing Home Mortgage Interest Rates
Yesterday's blog article pondered whether somebody should buy a home today at possibly a higher price, yet almost certainly lower interest rates, in order to take advantage of the $8,000 First Time Homebuyer Tax Credit instead of waiting for prices to bottom. This created some discussion in the comments and email section of the Tallahassee Real Estate Blog, and made me wonder if their might be another way to consider the impact of rising mortgage interest rates in the purchase of a new home.
So I decided to make a few graphs that demonstrate the impact changing interest rates have on the affordability of a home. It is easy to think that a change of interest rates of 1% is not that big, but when you consider a move from 5.25% to 6.25% (one percent), that is really an increase in the cost of borrowed money of 29%! What do you think would happen if labor costs rose 29% or land costs rose 29%?
The following real estate graphs visually depict the significance of rising mortgage interest rates in the cost of buying a home.
The Component Costs Of A $150,000 Home
This first graph shows that the 6 year cost of interest on a thirty year fixed rate mortgage is just under 23% of the total cost of the home. As interest rates rise, more money will have to be spent to own the home, but just how much more ...
Rising Home Mortgage Interest Rates Impact Cost Of A Home
A rise in Interest Rates to 6.75% on a thirty year fixed rate mortgage is shown above. For somebody who owns the home 6 years, the interest paid on a fully leveraged FHA loan would represent 28% of the cost of the home. The increase in the mortgage interest rate increased the cost of owning this home by more than $13,000 in just 6 years.
Historical Mortgage Interest Rates Much More Costly
A historical average Interest Rate of 9% on a thirty year fixed rate mortgage would run the carrying cost of a $150K house up almost $33,000 over today's rate . For somebody who owns the home 6 years, the interest paid on a fully leveraged FHA loan would represent 34% of the cost of the home (meaning more than 1/3rd of the cost of the home for 6 years is the interest paid to borrow the money to buy it).
Low Mortgage Interest Rates And First Time Homebuyer Tax Credit
The combination of incredibly low mortgage interest rates, coupled with the benefit of an $8000 First Time Homebuyer Tax Credit makes it a very tempting time for people to get off the fence to buy a home in Tallahassee. I believe that "the bottom" of mortgage interest rates is behind us and that we will see rates continue to rise as they have in the recent past. The combination of the following make it a true buyers' market.
- First Time Homebuyer Tax Credit
- Low Interest Rates
- Abundance of Homes For Sale In Tallahassee
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Discussion
Joe,
The only variable missing on those charts for the 6 year period is either depreciation or appreciation for the land and sticks and bricks. Another way of looking at your figures and the way your typical buyer looks at any big purchase item, is the cost per month. Using the 6 years of interest for each chart and adding the $6,000 closing costs from each chart and also adding an average property tax of $3,000 per year and insurance of $1800 per year, the following monthly costs would be $1229 first chart, $1447 second chart and $1779 third chart. Theses expenses do not include typical home ownership costs, like preventive maintenance, lawn care, and all the other nickel and dime stuff. You also have selling expenses at the end of 6 years not figured in. So Joe, at what point do you start telling people to rent? If rates go to 9% , I would think I could get quite a nice rental for $1779 a month and if the rates get there fairly quick, i might be able to rent the Taj Mahal with all the distressed homes that will be on the market. Just throwing out another way of looking at it....I only wish we could keep the rates in the mid 4% level to get rid of some of this inventory.
Doug,
The purpose of these graphs is to show how large a percentage of the total that your mortgage interest is going to be. Your points are are super, and I covered them in a blog a few months back. You also left out tax advantages to writing of the mortgage interest :).
As far as renting, that's fine if you're in Tallahassee for the short term. Do you really want to live in somebody else's house for ten years? Tomorrow's blog will also address your point in your last sentence...
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