Two recent reports by CNBC have stated the mortgage market is facing some major changes. The Obama administration is set to announce next week overhauls to Fannie Mae and Freddie Mac run programs and, according to many economic experts, mortgage interest rates are expected to go higher as the economy continues to strengthen.
These changes are going to affect home affordibility and buying a home will get harder as the government tries to roll back temporary housing fixes implemented during the recession. Here's what you need to know:
Calculating Higher Interest Rates
As rates rise, home ownership obviously becomes more expensive, but have you ever calculated the differences between just one percentage point? The numbers can be a little complicated so I'm going to show you what a higher interest rate means to your bottom line.
Interest rates reached an all time low last year around 4.25% on a 30 year conventional loan. Buyers who bought a home with a 4.25% rate on a $300,000 home (without taxes and insurance) were able to secure a payment of $1,472.82 a month.
Currently, rates are hovering around 5 percent for well qualified buyers. Five percent is still a fantastic rate, but if you've been sitting on the fence, you're probably kicking yourself as you missed out on last years rates.
Today at 5% interest your montly payment would increase to $1,610.46 on the same property, an increase at $137 a month. On your 30 year loan, you'll end up paying an extra $48,000 in interest. That's a nice chunk of change!
Home Affordibility Is Peaking
An increase by just one percentage point can add as much as 19% to the cost of a home, and by the end of this year, rates are expected to climb close to 6%. The good news is, while we will probably never see the extraordinarily low rates of last year, rates are still incredibly low.
The bad news is, these rates won't last long. The economy is recovering and the fed is expected to continue to raise rates to thwart inflation. If you calculate the difference between 5 and 6 percent on a $300,000 loan over 30 years, you'll end up paying an extra $67,000 by the time you pay off your home.
If you're waiting for the bottom of the real estate market you've already missed it. Although home prices are expected to decline another 5 to 8 percent over the next year, when interest rates hit 6%, you'll be paying another 19% in financing costs.
Even if home prices decline another 10% over the next two years, by 2013, interest rates will most likely be closer to 7%. And, in-case you didn't know, the government is making some changes to federally backed loan programs.
Currently, the government has a share of 95% of all mortgages and they plan on reducing that number to 50% over the next few years as required by the Dodd-Frank reform bill passed last year.
The bottom is now and if you plan on buying a home over the next couple of years, interest rates will never be as good as they are today. Unless you're paying cash, home affordibility isn't going to get better than it is today. If you're a ready and willing home buyer, it's time to get off the fence!
About The Guest Blogger: Lisa Udy is a Logan Utah real estate professional providing expertise for home buyers and sellers in Northern, Utah. Licensed since 2001, Lisa has been a top producing agent year after year and specializes in no pressure sales. To learn more about Lisa please visit herLogan real estate blog.