Even if you’ve taken steps to ensure you’re financially ready to buy a home, determining the “right” time to buy can be tricky. With interest rates increasing four times in 2018 and experts expecting the Federal Reserve System to raise them twice more in 2019, you might be wondering if now is a good time to buy a home. A small difference in interest rates can significantly affect the overall cost of your new home, so a wait and see attitude might not be the best course of action.
Here are some key things to know about how a change in rates can influence the cost of homeownership.
What is Meant by Fed Rate?
The Federal Reserve System, aka America’s central bank, works to create and maintain financial stability while balancing inflation and labor-market conditions by setting a federal funds rate. Part of this balancing act also includes the adjustment of the federal funds rate to encourage consumer spending. Increases or decreases to the rate impacts the cost of taking out an auto or home loan, carrying a credit card balance and even the stock market. Most financial institutions use the federal funds rate as the benchmark with which to set interest rates on loans. It also influences the rate of return on money market accounts and certificates of deposits.
How Does This Effect Home Prices?
The housing market is affected by changes to the federal fund rate. Interest rates, the cost of borrowing money, often increase along with each fed rate increase making the cost of homeownership more expensive. A mortgage calculator demonstrates how a small difference in interest rates can influence the costs of a new home in the short term and for years to come.
Consider these costs for a $200,000 30-year fixed term mortgage loan:
Interest Rate Monthly Mortgage Payment* Total Interest Paid
4.3% $989.74 $156,308
versus
5.0% $1,073.64 $186,513
*Principal and interest only
A less than one percent increase in the interest rate can cost you $83.90 more in payments each month and $30,205 over the life of the loan.
Shorter term loans aren’t immune to the cost of higher rates. Consider these costs for a $200,000 15-year fixed term mortgage loan:
Interest Rate Monthly Mortgage Payment* Total Interest Paid
3.875% $1,466.88 $64,038
versus
4.5% $1,529.99 $75,397
*Principal and interest only
In this scenario, a less than one percent interest rate increase can cost you $63.11 more in payments each month and $11,359 over the life of the loan.
Extra funds paid in interest could instead help fund your retirement account, pay for your child’s college education or save for your second honeymoon.
Should I Buy Now?
You’ve prepared for the purchase of your new home by boosting your credit score and saving for a down payment along with closing costs. Your monthly budget has new categories for expected expenses such as property taxes and home insurance. You’ve even set up an emergency fund account to help cover home repairs and maintenance. Does this mean you should buy a house now?
While no one knows for sure how high mortgage rates will go, financial experts predict a continual rise in rates in 2019. Prospective homebuyers shouldn’t wait for the next interest rate hike since they can lock-in a lower rate today. Complete a Generations FCU mortgage application in as little as 20 minutes to get pre-qualified.
Written by Freelance Personal Finance Writer, Tracy Scott