Although there are many financing products available, the majority of homeowners purchase their properties with 30-year fixed mortgages. Interest rates for these loans have been hovering around 4% for the last several years, with recent growing, logical speculation that they’ll rise to 5% by the end of 2018. The federal funds rate was flat (essentially at zero) from December 2008 all the way through December 2015, then ratcheted up once in 2016 and three more times in 2017 along with the expanding economy and thriving stock market.

Will a 1% rate hike be a big deal? What will this mean for a typical homeowner mortgaging now versus a year from now? Let’s break it down. The average sales price in Metro Phoenix broke the $300,000 threshold in 2017. Using this as a purchase price and assuming a 10% down payment, not accounting for other variables like taxes, hazard insurance, mortgage insurance, or HOA dues, here’s how a mortgage would be affected by interest rates rising from 4% to 5%: Monthly PI (Principal and Interest) payments would go from $1289 to $1449, a 12% increase. Over the life of a 30 year loan, the sum of all payments would go from $464,047 to $521,791. So the math is tricky, surprising, and powerful!

This 1% interest rate hike corresponds to a whopping 12% hike in monthly payment and payment sum, regardless of loan amount! Interest rates should rise in 2018, and low supply:demand ratios strongly indicate that home prices will too. So monthly payments will likely go up another 5-7% in 2018 (as they have in each of the last couple years) along with rising prices. Buyers, investors, and upsizers strategizing their timing should seriously consider acting sooner rather than later.  Interest rates were flat for so long that threats of their rise became the boy crying wolf, but should now be taken seriously.  Simultaneously rising rates and prices will make for significantly higher monthly payments and overall costs of home ownership, not to mention the opportunity costs of waiting and having to spend a higher portion of income on housing.  If you’re considering a move, carefully do the math and run scenarios against likely changes coming up to make the wisest financial decision for you and your family.

Beth Cheney Cox, United Brokers Group Market Analyst
Raw Data Source:  ARMLS
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