The Truth about Mortgage Rates

By Neil Funsch

 

Let’s talk about mortgages! Even as the holiday season unfolds (or grinds on, depending upon your point of view) real estate and mortgage interest rates don’t take a vacation – especially here in our neighborhood. Despite the snow and cold weather, housing remains a hot commodity. As for interest rates (like some stress levels), they appear to be on the slow rise.

Just a casual survey that I took the other day revealed that there were 30 houses for sale or under contract on the western edge of the Greater Park Hill area between Colorado and Eudora and from Colfax to Martin Luther King. (An interesting note is that each listing had a different Realtor on the sign.) This is in line with the commonly held notion that our neighborhood of Greater Park Hill is widely recognized as a fabulous place to live! But what happens when interest rates adjust back upward to higher levels as they are expected to do. How exactly would that affect someone’s buying power and what could it mean to us?

Without getting too eye-crossingly technical, let’s look at what would happen to the buying power of someone who wanted to keep their principle and interest payment at $1,520 a month. At today’s levels of a 4.5% interest rate on a conventional 30 year mortgage, a buyer could support a mortgage loan amount of $300,000. If interest rates rose by a mere half percent to 5%, that same $1,500 monthly payment could now support a mortgage of only $283,200. That represents a loss of 5.5% in buying power. If mortgage interest rates rose another half of a percent to 5.5% they would lose an additional 5.5% in buying power and could now only support a mortgage of $268,000. In this example, a 1% rise in interest rates translates into an erosion of buying power of 11% or $32,000 in dollars.

This all sounds pretty grim, but these numbers don’t’ tell necessarily mean this holiday story is doomed to an unhappy ending. The fact is that housing prices are on the way up and are expected to continue that trend especially here in our happy kingdom. If we return to the example of our buyers who have fallen in love with a Park Hill home, we can take a look at some other options they might have. The simplest solution is to offset the percentage of decline in their buying power by increasing their monthly payments by that same percentage. In this example, when faced with the 5.5% decline, they can raise their $1,520 monthly payment ceiling by $90 to $1,610. By tightening their belts a little they can become a part of the neighborhood even in the face of rising rates.

Neil Funsch is 18 years a Mortgage Broker, the last four in Park Hill. He can be reached at 303-229-2684 or neil.funsch@gmail.com.