Bill Morris: What do higher interest rates mean to buyers and sellers?

What do higher interest rates mean to buyers and sellers?

Planning to buy a home?  Missed the tax incentives over the past couple of years but counting on low interest rates to help?  If you're waiting for a better time to buy, at least in the Austin/Central Texas real estate market, don't wait too long.  As I have written for many months, the Austin area never felt the housing downturn in the way the national news has described it.  Despite some inventory build-up in recent months, values remain stable in most areas and it is entirely reasonable to expect that prices will be creeping upward during 2011.

More importantly, mortgage interest rates are on the move.  Many of us have predicted for a long time that rates could not stay as low as they did as long as they did, and in historical terms today's average of about 4.75% is still incredibly low.  Nonetheless, just a few weeks ago I saw 30-year mortgages quoted very near 4%.  They have risen steadily since then and most observers believe that this time the run-up will continue. 

What does that mean to you?  The short answer:  higher monthly payments and reduced buying power.  See the table below:

Current A B C D
Sale Price $200,000 $200,000 $200,000 $200,000 $200,000
Interest Rate 4.00% 4.50% 5.00% 5.50% 6.00%
Loan Type/Term FHA/
30 Years
30 Years
30 Years
30 Years
30 Years

Down Payment % 3.50% 3.50% 3.50% 3.50% 3.50%
Down Payment $ $7,000 $7,000 $7,000 $7,000 $7,000
Loan Amount $193,000 $193,000 $193,000 $193,000 $193,000

Principal & Interest
$954.83 $1,013.37 $1,073.64 $1,135.58 $1,199.10
Diff. vs. 4.00%
$58.54 $118.81 $180.75 $244.27

Equal Payment
Buying Power
$200,000 $187,738 $176,572 $166,386 $157,079
Diff. vs. 4.00%
($12,262) ($23,428) ($33,614) ($42,921)

NOTE:  Total monthly payment will include property taxes, hazard insurance, and monthly FHA mortgage insurance premium.  Results calculated here include only monthly principal and interest payments.

What that chart assumes you're planning to buy a home using a 30-year FHA mortgage loan, making the minimum 3.5% down payment.  If your income and financial condition would have qualified you for a $200,000 purchase at an interest rate of 4%, you have already lost more than $12,000 in buying power.  If you wait until rates rise to 6%, you will have lost almost $43,000 in buying power -- at that increased interest rate you will only be able to buy about 80% of the property value that you qualified for a few weeks ago!

For sellers:  This change in the market is important to you -- directly reducing the pool of prospective buyers for your properties.  Given all the other uncertainties in today's real estate market, now is not the time to "assume the best."  If you are planning to wait until Spring to market your home, or to temporarily withdraw your listing until the "traditional" selling season, my advice is to avoid that temptation.  You need to be part of the market activity now and throughout the Winter.  I believe the 2011 will be a relatively strong year in Central Texas real estate, but if you want or need to sell in the next six to twelve months you need to be part of this process now.

Bill F. Morris, ABR, CRS, CDPE, e-PRO, MBA
RE/MAX Capital City
Call or Text:       512-785-3345
Toll-Free:           1-800-692-8784, x 162

Your personal referrals are the best measure of my success!

Comment balloon 1 commentBill Morris • December 16 2010 11:06AM


Hi Bill, great information for any potential buyer to use...

Thank you for sharing!

Posted by Joshua Zargari, MJ Decorators Workshop (MJ Decorators Workshop LI staging and home decorating) almost 10 years ago