Interest Rate Update & Common Home Buyer Loan Mistakes

June 17th, 2015

2015 Interest Rate Update

A strong May 2015 jobs report fueled predictions that the Federal Reserve may raise interest rates in September or October, according to Washington MarketWatch. While unemployment ticked up slightly from 5.4 to 5.5 percent, this was attributed to more job-seekers entering the labor force in response to favorable hiring conditions.

Interest rates are now in the very low 4 percent range, up from the high 3 percent range very recently. The Mortgage Bankers Association predicted in May that we would see rates closer to 4.5 percent by the end of this year, and in the 5 percent range by the third quarter of 2016.

How does a half-point interest rate hike affect home buyers?

Here’s an example using a zero down payment, meaning the loan amount equals the purchase price.

1. A home buyer with $1,500 a month to spend, expecting to purchase a home with taxes and insurance of $2,500 and $700 a year, respectively.

2. A home buyer with $4,000 a month to spend, expecting to purchase a home with taxes and insurance of $6,000 and $1,500 a year, respectively.

In this scenario, when interest rates rise from 4.0 to 4.5 percent, the loan amount each buyer qualifies for drops by around 5.8 percent.

Common Home Buyer Loan Mistakes

- Waiting to save extra cash while interest rates rise significantly.

In the 4 to 5 percent interest rate range, each additional $10,000 of down payment reduces the monthly principal and interest payment by around $50. It’s worth considering whether an increase in interest rates during the time it will take to save the $10,000 is likely to cancel out the savings resulting from the larger down payment.

- Depleting cash reserves by paying off too much debt.

Wait… paying off debt is always good from a lender’s standpoint, right? It’s understandable to think so, but lenders also need to know that buyers have cash reserves on hand. Paying off a $3,000 credit card may leave some buyers with reserves that are too low for them to qualify for a loan, while in the end the cash outlay reduced their monthly debt burden by just $40 a month. It’s always wise to check with a good mortgage professional before making any big decisions in this area.

The bottom line: It’s not all bad! :) Most loans close successfully, and even when interest rates go up to 5 percent (which is not likely to happen very soon) they will still be extremely low by historical standards. As always, having good information and knowing about potential pitfalls are the best ways to ensure a successful home sale or purchase.

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