On March 21, 2018, the Federal Reserve increased the Federal Funds Rate by 0.25%. This is the 6th rate hike since the economic collapse and they are expected to increase the rate 2 more times in 2018 and 3 times in 2019!
Though the Federal Funds Rate is not the same as mortgage interest rates, when it increases, typically, mortgage interest rates will eventually also rise. This means Buyers lose Buying Power and end up having to pay more interest back to the lender.
For example, if the mortgage rate were to increase from 4.5% to 5.5%, a Buyer purchasing a $700k home with 20% down would LOSE over $60,000 in Buying Power AND end up paying over $123,000 MORE in interest over the life of the loan!
So Buyers... Don't Snooze! If you don't lock in a mortgage rate while it's still low, you will lose it.
Sellers... Jump On It! Now may be the best time to sell because Buyers are more motivated to buy while rates are still low, which is still putting an upward pressure on price. Once rates hit a certain point, it will put a downward pressure on price due to the loss in Buying Power.
If you're thinking about buying, selling, or investing in real estate, contact me at 619-339-3645 or through my Contact Page to set up a Free, No Obligation Consultation.
Hey, what is up guys, it’s Emil Ayoub, your Realtor here in sunny San Diego.
First off, just want to mention, I’m giving you a special free gift, I’ll let you know how to get it a little later in this video.
So… if you haven’t heard… Interest Rates are going UP.
They’ve actually been on the rise for a while now, and they will continue going up.
Yesterday, the Federal Reserve raised the Federal Funds rate by a quarter of a percent. This is the 6th time since they’ve raised the rate since the financial crisis in 2008 and they are expecting 2 more rate hikes this year and 3 rate hikes next year.
Now, this is actually good news… because it means the economy is getting stronger. And historically higher interest rates are very normal and indicate a healthy economy. Obviously, it’s not good news for buyers who don’t… take action now. For everyone else, it’s good news.
To start… I want to clarify… what is the Federal Funds Rate? It’s actually NOT the same thing as mortgage interest rates, which a lot of people think… what it is is the interest rate that banks charge each other for overnight loans so they can meet their reserve requirements.
So does it affect mortgage rates? Kind of… they’re not directly tied to one another, however, over time, as short-term interest rates go up, long-term interest rates typically also rise, which will increase the rate of 10-year treasury bonds, which is what influences mortgage interest rates. Super fun stuff, right? So basically, movements in the fed funds rate create a sort of ripple effect which does indirectly affect mortgage interest rates. Hope that makes sense.
So what does that mean? Well if you’re one of those people that’s thinking about doing something… if you’ve been sitting on the fence, waiting for the perfect moment… now is the time to do it.
Now I’m not trying to make you buy or sell if you don’t want to, but if you are thinking about doing something, you should know rising rates will affect that.
And you might be surprised at how much a change in interest rate actually affects how much you pay the bank in interest and how much you qualify for. So I built a nifty tool that I’m giving you to help illustrate, so let’s take a quick look.
So this is my SHOCKING Rate Comparison Tool that I’ve created and I’m giving to you for FREE. Here’s how it works…
First, we’ll assume that you’re purchasing a property at $700,000, which is close to the average sales price here in San Diego, with 20% down. That gives you a loan amount of 560.
With loan scenario #1, a 4.5% interest rate, here is your monthly mortgage payment, $2837. Now, you can see that if your interest rate were to increase to 5.5%, your monthly payment would increase to $3179… a difference of $342 per month. If you were to keep the home for the entire 30-year life of the loan, you would end up paying over $123,000 EXTRA in interest!
…And it gets WORSE… because not only is your payment higher and the amount of interest you pay higher, but also, the portion of your payment that goes towards paying down the principal balance is LOWER!
Let’s take a look at the amortization schedules here, fair warning, most of your eyes may gloss over seeing all these numbers*… you don’t need to pay attention to all of this, except right here… At 4.5% your first payment of $2837 has $737 going to pay down your loan, the other $2100 is interest… and with loan #2 at 5.5% your first payment of $3179 has only $612 going towards principal. That’s $125 less to pay down your loan even though you’re paying $342 more per month! The difference all goes to interest!
So let’s go back to the calculator and let’s say you decide to the sell the property after 5 years. With loan #1 at 4.5%, your remaining loan balance at the end of 5 years would be about $510,000… that’s how much you need to pay the bank back… with loan #2 that number would be about $517,000… it’s over $7,000 more! So with the higher rate, if you sell after 5 years, you owe them an extra 7 grand! …plus you’ve paid them… nearly $28,000 EXTRA in interest over just that 5 year period! That is pretty SHOCKING, am I right?!
Now this example was with the purchase price and loan amount remaining the same. Well, let’s say the $2800 payment in Scenario 1 is the max you qualify for based on your income, or maybe that’s just the max that you want. That means when the interest rate increases, you won’t qualify for the same loan amount, so to stay at the same payment with the new interest rate, you now only qualify for $499,000. So using the same 140 down payment, that means you can only buy a $640,000 home rather than the $700,000 you could’ve bought before. So you’ve lost over $60,000 in buying power… meaning even though you’re getting the same payment as before, you have to settle for a home that’s worth $60,000 less than before because the interest rate is now higher. Crazy, crazy stuff…
If you’d like to get this tool for FREE to play around with, and all the equations are built in so you just plug in what number you want in the yellow cells only and it’ll automatically calculate, just simply go to the link in the description, get on my VIP Insider List, and I’ll send you this tool for free and you’ll also get some other really cool tools that I’ll be creating in the future.
So hopefully now, if you’re a Buyer, you realize how HUMONGOUS of an affect interest rate has on how much you pay and can afford… so my advice is… don’t snooze. You snooze, you lose! Right now is the time to take action. If you don’t use the low interest rates now, you’re going to lose it. And as rates go up, your buying power drops dramatically.
For Sellers… it’s time to jump on it. This could be the best time to sell your house because when interest rates are going up, buyers get more motivated for multiple reasons… they see prices still going up… they see interest rates going up… they know their buying power is going down… so they are more motivated to take action faster, which is putting an upward pressure on price.
After interest rates reach a certain point it will start to put a downward pressure on price because interest rates are higher so the amount they qualify for decreases.
Now, I’m not a psychic, unfortunately, otherwise I would be extremely rich from lottery winnings and buying bitcoin in 2009, so I’m not predicting or projecting what will happen, I’m simply saying that this is what is happening now and you should use this information to your advantage.
Hope this was helpful to you. If you know anyone that’s thinking of buying or selling, this information could be worth thousands of dollars to them, so do your friend a favor and share this with them or tag them in the comments.
If you have any questions or there’s anything I can help with, feel free to send me a private message or you can call or text me at 619-339-3645.
Until next time, this is Emil Ayoub in San Diego.