We are a sound-bite society.
But it's not entirely our fault.
We are
bombarded daily with so much information from so very many sources that it is
impossible to process it all. So we lean
on those little blurbs, the abbreviated headlines that we see on our phones or
our televisions or on the internet, or…. God forbid, on Facebook.
But that's another subject.
And yesterday, one of the top blurbs
vying for your attention and mine was that the Feds have raised the interest
rate. That may be the sum total of what you
heard or saw. Just that one little
phrase. And a conversation similar to the
following might have flitted through your head.
"They've raised the interest
rates! I probably can't buy a
house. I knew I should have already done
that. My credit card payments will be a
lot higher. I'll never get out of debt
and I'll have to drive this car, like, forever…"
Let's
face it. The majority of us don't really
understand the whole interest rate thing anyway. We are not accountants and somehow that
entire lesson about compound interest went entirely over our heads. And like every other soundbite, blurb or Facebook
headline you read, you really only want to know one thing.
What does a rise in interest rates really
mean to ME?
I don't
pretend to be a mortgage expert or a financial analyst. (Good thing, too, because I am woefully
unqualified to be either.) However,
after all these years in real estate, there is one thing I can help you
understand -- with the help of my handy-dandy loan calculator app.
How
does a change in interest rate really affect your ability to buy a home?
The
answer is… not that much.
The
following is a simplified example.
Remember, these figures are principal and interest only. If you were actually looking at your
potential payment on a home, it would include the cost of taxes and insurance
as well which will vary depending on your area.
So, here's the most basic example
I can think of:
You are
purchasing a $100,000 home and are going to pay for it over thirty years. The principal and interest portion of your
payment at a 3.75% interest rate would be - $463.12
At 4.0%
(the Feds raised interest rates by .25%) your payment would be - $477.42.
That's a difference of a whopping $14.30 per month. But let's assume they might
raise it again.
At
4.25% - $491.94
At 4.5%
- $506.69
At 4.75%
- $521.65
And at
5%, that payment will be $536.82.
If the
interest rate goes up a whole percentage point in 2016, the difference in your
principal and interest payment will still only be a little over $70 a month.
Come on,
admit it. You spend that on fast food
and pop at the convenience store.
So, how
does this interest rate hike affect your ability to get a mortgage?
Not much.
Not much at all.
