What Do Higher Rates Mean?

I do not mean to beat a dead horse here; however the topic of higher interest rates seems to be dominating the headlines of the financial world. While these articles dissect the possible effects of higher rates on the stock markets, business performance and more, the question we would like to focus upon is -- how do higher rates affect the average individual? There is no doubt that these rates may make home and car financing more expensive -- but by how much? As of recently, rates have risen a little more than .50% from rock bottom record lows. What does one-half of one percent cost? Using a base of $100,000, this would raise the cost of owning a home by approximately $42.00 per month. If one were financing $300,000, then the additional cost would be $125 per month. These numbers are presented before the effect of taxes is taken into account. Most homeowners can deduct the cost of interest. In this case we will assume a tax bracket of 25%, which would lower the cost of the increase to around $94.00 per month.

Another effect of the higher payment would be qualification for the home loan. Lenders limit qualification to a certain amount of one's monthly income. That ratio will vary widely based upon the details of the transaction and type of loan -- amount of down payment, credit score, etc. However; assuming that the person is already at the "limits" of qualification, then the $125 per month would lower the qualification by approximately $25,000 of the total loan amount. This entire analysis is truly an oversimplification, yet it is important to analyze. Homes have been as affordable as they have ever been and a half-of-one percent change will not change that. Keep in mind that we still are not predicting the future of rates. Finally, what about car loans? The change in the cost of owning a car would be much, much less than owning a home. This is because car loans are much smaller than home loans, they are based upon shorter term rates which have not changed as much and are many times offered at discounts as low as 0% in new car promotions. The conclusion? At today's rates, purchasing a car or a home is still a bargain. But depending upon the future of rates, the bargain may not last forever.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com