Outer Banks Real Estate Blog

Outer Banks Real Estate Blog-FED Gearing Up To Raise Rates: What Impact Will It Have On You?

If you have been following the financial news lately you may have started to hear talk about when the FED is going to raise interest rates. It should be no surprise that sooner or later the FED will have to raise rates since they have been at all time lows for many years.  The FED is going to have to be extra careful when the time comes to raise rates. When do they do it?? How much?? When do they stop?? In the next 3 to 6 months I think we will find out the answer to all of those questions.  In the meantime it’s time to start thinking about how it's going to impact you, me, everyone.

First and foremost raising rates will hurt anyone currently making payments on revolving lines of credit like credit cards, home equity lines, and any loan based on the prime rate. Those minimum payments are going to go up each time the FED raises rates. Many people are struggling to make ends meet and rely heavily on credit to get by and now is the time to make those extra payments to pay down some of that debt if possible.  Another thing to consider might be moving all of the remaining revolving debt to a fixed loan and take advantage of low fixed loan rates. The payments may be more in the short term because you are paying down principal and interest but in the long run may save you if rates increase dramatically. Do your homework to see what options are right for.  On a more positive note for everyone who has been getting those ridiculously low interest rates on checking, money market, cd’s and money market accounts will be happy as those rates will rise paying out more interest.

Now let’s talk about what affect all of this will have on mortgage rates. Finally the real estate market is starting on the road to recovery, at least here on the Outer Banks it has, and low mortgage rates have had a big impact on that. When the FED does decide to raise rates mortgages will follow suit as well. As mortgage rates rise it decreases a buyer’s purchasing power substantially.

Example: If a buyer is qualified for a maximum monthly principal & interest payment of $1500 month with 20% down a buyer can purchase a house for $418,750. However when mortgage rates go up 1% the buyer can only purchase a house for $375,000 to still have a P&I payment of $1500 a month.  

Purchase price $418,750-$83,750(20% down)=$335,000 Loan amount
Loan amount $335,000 X 5% 30yr Fixed Mortgage=$1500 P&I payment

Purchase price $375,000-$75,000(20% down)=$300,000 Loan amount
Loan amount $300,000 x 6% 30yr Fixed Mortgage=$1500 P&I payment

Just a 1% increase in mortgage rates decreases a buyer’s purchasing power by $43,750!! If you are currently looking to buy or on the sidelines waiting you need to consider what kind of impact rising mortgage rates will have on your ability to buy.  Get with your local lender and Realtor to find out what prices are doing in your area(remember real estate is local not national) and ask them to help you figure out how much rising mortgage rates will hurt you.  You may realize that now is the time to jump off the fence and get the house you have always wanted.

For more information about the Outer Banks real estate market go to www.HometownOBX.com  or email MattHuband@HometownOBX.com

Matt Huband is Broker/Owner of Hometown Realty in Kitty Hawk, NC working with buyers and seller from Corolla to Hatteras.   

Published Friday, September 25, 2009 10:43 AM by Matt Huband