1% Can Cost You $52,000

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Increasing Rates


Interest rates are on the rise in 2017. Since the Federal Reserve voted to raise a key interest rate by a quarter of a percentage point in December mortgage rates are on the rise. The move comes with the intent to raise rates several times throughout 2017.

If you were shopping for a home in 2016 then you know that real estate experts were predicting that interest rates would soon be on the rise. As 2017 rolls in their predictions are coming true, and the year has begun with a higher rate than any point in the previous year. Now experts are saying that the days of 3.5% rates are in the rearview mirror. 

Realtor.com® Chief Economist Jonathan Smoke states “The Fed- and financial markets – will have to wait to see what comes of the U.S. fiscal policies in the weeks and months ahead and how that impacts the economy and the potential for more inflation.” He then added the “Fed announcement is going to have the greatest impact on first-time homebuyers as they consider their monthly payment budgets. Rates will likely stay the same until about March so buyers considering a purchase in 2017 may want to consider getting into the market now.”


The Cost of Increasing Rates


Everyone understands that a higher interest rate means that they will be paying back more. But exactly how much of a difference does it make? Though 1 does not seem like a large number, a 1% change in your interest rate could cost you over $50,000, which is a large amount of money. 

Example:
Picture a house that is priced at an even $250,000. Over 30 years with a 3.6% interest rate the monthly payment would be $1136. Now increase just the interest rate by 1%, making it 4.6%, and that monthly payment increases to $1281. 

That’s a difference of $150 a month, or $52,200 over 30 years.

Home Price $250,000
Fixed Interest 3.6%
Terms  30 Years

Monthly
Payment

$1,136


 

 

 

 

 

Home Price $250,000
Fixed Interest 4.6%
Terms 30 Years
Monthly Payment  $1,281

 

Cost Vs Price


The $52,000 variation represents the difference between the price and cost of the home. ‘Cost Vs Price’ is an important concept to understand for anyone considering buying a home, because rising rates are an inevitability. 

The price of a home would be a one-time fixed amount. In our example the price of the home was $250,000. However, the cost is an ongoing expense that will affect the final value of a home. So, in our example, the cost is the monthly payments, which include interest. A 1% difference in interest would change the cost 52,200 over 30 years. So, the $250,000 home will cost $302,200 with just one percentage point. 

The house would be exactly same; the only difference is timing. Speak with the experts at Faber Homes to begin building your new home now, before rising rates cost you any more. Contact Us today.