How Do Interest Rates Affect Me?

November 8, 2018

How Do Interest Rates Affect Me?

Those looking to buy a home are often inundated with alarmist articles warning that the fed will be increasing the interest rate.  But what do these interest-rate hikes actually mean for your bottom line?

What is the interest rate?

Banks loan us money for a fee – that fee is the interest on the borrowed money that we pay back when we pay back a loan.  But if your bank wants to make it more expensive to borrow, it’s not as simple as just slapping on a new rate, as a grocer would with milk prices. It’s something controlled higher up by the Federal Reserve, America’s central bank.

The Federal Reserve – “The Fed”- was given in 1977 two tasks by congress: First, keep prices of things Americans buy stable, and create labor-market conditions that provide jobs for all the people who want them.

When the inventory of affordable housing is low – as we saw to be increasingly the case in 2017 and 2018 in Los Angeles – the fed raises the interest rates.   Although this can be frustrating to home-buyers it has higher rates bring good news for savers as banks raise their interest payments on deposits.  It can also shift the housing market from a strong seller’s market – to a more equal playing field for buyers and sellers.

Historically where are we with interest rates?

Despite the feeling that many first-time home buyers feel that they may have “missed the boat” on a great interest rate, we are still at a historical low.

This chart from Trading Economics shows the trends in interest rates from the 1970s to present.  Although there is fluctuation, we are still solidly low compared to, for example, 1981 when interest rates peaked at 18.45%.

How does this affect my loan payments?

Excellent question!

If one were to purchase a home using a 20% down-payment on a 30-year mortgage, for the price of $1.49 Million:

In 2015, with the annual average rate for the year of 3.85%:

Total cost of the mortgage would be: $2,011,750

Monthly payments would be: $5,588

In 2016, with the annual with the annual average rate for the year of 3.65%:

Total cost of the mortgage would be: $1,963,050

Monthly payments would be: $5,453

In 2017, with the annual with the annual average rate for the year of 3.99%:

Total cost of the mortgage would be: $2,046,211

Monthly payments would be: $5,684

In 2018, with the current rate of 4.63%:

Total cost of the mortgage would be: $2,207,560

Monthly payments would be: $6,132

On this home, for every 1% increase in the interest rate a home buyer can expect, roughly, a $600 increase on their monthly payments.  For every .01% increase its roughly a $5 increase to one’s mortgage payments.

While these numbers can feel like a massive difference, historically they are relatively small fluctuations.  Keep in mind that in 1981, when interest rates were at an all-time high, monthly payments on the same home would have been closer to $20,000.  In 2007, at the peak of the housing bubble, those payments would have been, $7,409.

So, what does this all mean?

As realtors – we are constantly asked whether or not it’s a good time to buy –

the answer is still YES.

We are not seeing the same low rates as we saw in 2015 but we are still in a very strong borrower’s market.

This article was written by Erica DeBear with collaboration from Kristen Eck of New American Funding.

150 EL CAMINO DRIVE, LOS ANGELES,CA. 310-595-3888 © 2017 DOUGLAS ELLIMAN REAL ESTATE. ALL MATERIAL PRESENTED HEREIN IS INTENDED FOR INFORMATION PURPOSES ONLY. WHILE, THIS INFORMATION IS BELIEVED TO BE CORRECT, IT IS REPRESENTED SUBJECT TO ERRORS, OMISSIONS, CHANGES OR WITHDRAWAL WITHOUT NOTICE. ALL PROPERTY INFORMATION, INCLUDING, BUT NOT LIMITED TO SQUARE FOOTAGE, ROOM COUNT, NUMBER OF BEDROOMS AND THE SCHOOL DISTRICT IN PROPERTY LISTINGS SHOULD BE VERIFIED BY YOUR OWN ATTORNEY, ARCHITECT OR ZONING EXPERT. EQUAL HOUSING OPPORTUNITY.

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