With the already increasing rates and the speculation that rates will continue to increase throughout 2014 there will be an effect on housing. The question becomes how much. We expect a minimal effect resulting in the higher interest rates but nothing that will drastically affect housing. The problem becomes the fact that the higher home prices increase and the higher the mortgage interest rates increase the less purchasing power buyers have and the less they qualify for.
300,000 loan amount at 4.75% interest rate= $1,565
300,000 loan amount at 5.75% interest rate = $1,750
*That is an increase of $185 per month
Let’s assume that a buyer is buying at the maximum they qualify for and was quoted a rate of 4.75%. That buyer was told that the principle and interest portion can’t exceed $1,565 per month in order to obtain financing. If rates increase 1% and are now at 5.75% than the buyer will qualify for approx 32,000 less than he did when the rates were at 4.75%. The reason for that is because there is more interest that takes up more of the $1,565 a month the buyer is qualified for.