The Effect of Increasing Mortgage Interest Rates in 2010.

Ever wonder what the effect of increasing mortgage interest rates are on your ability to purchase a home of choice? The key words here are “home of choice”

We all know that higher rates mean higher monthly payments. But it is not the higher payment that causes most of the pain when rates increase.

When a family or individual considers buying a home of choice the overwhelming majority focus on the characteristics of the home they perceive to be the right choice. This focus develops into expectations that can be as strong as all of the other factors involved in purchasing a home combined. So how does the increase in rates impact these expectations?

1. For every 1/8% change in rates monthly payments will increase by about 1.5%.

2. Lenders consider an applicant’s ability to pay based on monthly payments otherwise known as “housing costs”.

3. Each 1.5% increase in monthly payment reduces the housing price that buyers can afford by an amount that is in direct portion.

If you take the current outlook for interest rates in 2010 and bet on the increases to be around 1% the price of a house you may qualify for is reduced by about 12%.

For example: If your target home price (based on monthly outlay) is $300,000 at an interest rate of 5%. A rate of 6% will reduce that target home price to $268,500. The challenge now becomes finding the home that meets the expectation set at the $300,000 level for a price of $268,500.

In a declining market such as we have been experiencing for some time now time is on your side. However, pricing is beginning to stabilize and will eventually begin to rise again (in many of our areas this is already happening). When prices are stable or increasing the effect of higher rates is even more significant.

The message is simple. If you are ready to purchase, do it as quickly as you can and take advantage of the lower prices, lower rates and tax credit programs.