rates-risenIt’s no secret that the biggest story in the housing industry since the election has been the rapid rise of interest rates.

As recent as late October getting a 30 year mortgage at 3.5% was a realistic option. Almost immediately following the November election we saw rates jump and quickly hit 4%. As of today (12/6/16) we are currently sitting around 4.125% as the common rate for a 30 year mortgage.

But what does that really mean? What effect can a small change in rates mean for today’s home buyer? 

Let’s assume that with a 3.5% interest rate you are qualified for a $300,000 loan amount. In this scenario that means you would be approved for a monthly principal and interest payment of under $1350 per month.

Notice in the chart below that as rates increase your ability to purchase that same house decreases and once rates hit 4% you can now only qualify for a $280,000 loan. In other words, with a .5% increase in the interest rate you’ve lost $20,000 in purchase power. That’s a big difference in the condition and amenities of the house you can afford.

rates-chart

At the same time let’s assume you’re shopping below your budget but would still like to stay around a $300,000 loan. At 3.5% your monthly principal & interest payment is $1347.13 but once that jumps to 4% you’re monthly payment, for the same house, jumps up to $1432.25…a monthly increase of $85 or over $30,000 in additional payment over the life of the loan.

What does this all mean for the 2017 market year? In a sense, it depends on how consumers react. Historical trends show that we may quickly adapt to 4% as the new normal (read more here) and if that’s the case we can expect a market very similar to 2016. However, if buyer’s push back as they attempt to figure out the direction of our economy, and if we continue to see record lows in available inventory, then the potential for a slower sales year is certainly there.