Sunday, July 14, 2013 / by Ira Miskin
In this still shaky economy, practically no one, it seems is sheltered from the still swirling economic storm. Even as housing prices inch up which is good news for home sellers, rising interest rates on home loans are beginning to make it tougher for home Buyers to purchase the homes they want. CAUTION: Buying and selling a home in this complicated market can be hazardous to your pocket book unless you know the facts and have the right Team in place to shepherd you through the storm.
To set the stage, you must be aware of how mortgage interest rates affect Buyers working to qualify for a home mortgage and how, in many price categories, rising and higher interest rates can limit sales and profitability for home sellers. According to tracking reports provided publically by Freddie Mac, the giant secondary market mortgage buyer, in just the past year, interest rates have been volatile and, in many respects mirrored the volatility of key aspects of the marketplace. For example, in January of 2012, according to Freddie Mac’s Primary Mortgage Market Survey of 30 year fixed rate mortgages, the average interest rate was 3.92%. By December 2012 it had declined – great news for both Buyers and Sellers – to an average of 3.35%. But by July of 2013, rates had risen to an average of 4.07%. Now that might not seem like much but consider the impact of these rising rates for a home buyer trying to get mortgage loan approval to buy a home, for example, in Kennesaw or Acworth for $225,000.
Many home buyers in this price category are first-time home buyers with enough good credit to qualify for a loan, but not always enough cash to make the down payment and pay the lender fees (called closing costs) required to purchase a home mortgage loan. Many of these buyers turn to FHA to acquire their home loan. Most lenders servicing Buyers in Cobb County will initiate the FHA loan process of loan approval for Buyers whose credit scores are above 640 and whose other credit-worthy checkpoints like their debt-to-income-ratio, employment record, loan and credit card payment records etc. meet the lender’s requirements. FHA will insure a buyer’s loan and allow the Buyer to purchase that loan with only a 3.5% down payment. In addition to the down payment, the lender’s service fees, the cost of an appraisal, home inspection, 1 year’s home-owners insurance premium, 1 year’s mortgage insurance paid up front to FHA, and advances (called “pre-paids”) on interest, property taxes and other closing expenses can total as much as another 3% (or more) of the loan amount – a cash requirement needed for the Buyer to close their loan to buy your home.
The interest rate plus a portion of the pay-down of the principle loan amount plus one 12th of that year’s property taxes, plus one 12th of next year’s home-owners insurance premium, plus one 12th of next year’s mortgage insurance premium charged to the buyer monthly for the life of the loan by FHA, makes the monthly payment on that $225,000 home purchase look like this
Example: Est. Monthly Payments on a $225,000 Home Purchase in Cobb County
Mo. / Year
Int. Rate %
FHA Mtge. Insurance
For the Buyer to purchase your home using an FHA home mortgage loan these are the approximate primary cash requirements for a home loan:
Example: Est. Cash Requirements on a $225,000 Home Purchase in Cobb County
Inspection & Appraisal
1st YR H. O. Ins. & 1st Year Mtge. Ins. (1.75%)
1st Month Loan Interest
2 Mos. for 2nd Year’s H.O. Ins.
Lender Fees (est.) 2% of Loan Amt.
Other Closing fees & Taxes-Est.
Est. Total $ Required
Although the amounts in both charts are estimates and can vary from loan to loan and from home sale to home sale, it’s pretty easy to see how the amount of cash required for a typical home sale, and the impact on monthly mortgage payments the fluctuating interest rates have, can directly affect the sale of your home. For a home buyer there’s an $89 dollar per month difference in payments. That’s an extra $1068 per year paid on the higher interest rate. The amount of interest paid to your lender is $130 per month higher which is $1560 per year more paid in interest on the loan. The amount paid toward principle loan is $41.81 per month lower meaning the principle reduction will be nearly $502 less in the first year of the home loan. If all these numbers start to blend in together – and for many buyers and sellers these details can be somewhat daunting – know these simple but critical factors when it comes to interest rates, home loans and selling your home in a time of rising interest rates:
- As prices continue to rise so will the cost of purchasing a home loan
As costs rise fewer Buyers in many home pricing categories can afford a loan
Seller contributions to the Buyer’s closing costs will rise to keep pace with loan cost
The balance between sale price and Seller’s Net (what’s left for you after all expenses) becomes an even more critical calculation in the sale
Selling and buying homes in any market can be complicated. Don’t let a fluctuating market scare you from taking advantage of rising prices despite rising interest rates. With the right Team in place, one that brings Agents with top negotiating skills, backed up with top marketing experts, and a support team of qualified lenders, inspectors, appraisers, researchers, and more, much of the uncertainty can be anticipated, and profitably factored into both a Sell and a Buy.
For the readers of Houses Atlanta.net you can call me direct at 770-672-8732 and ask for a free and confidential market analysis and in-home evaluation to help you understand more fully what your home is worth and how you may be able to get top dollar in today’s market to leverage your purchase of a new home while prices still hover below the market highs despite rising interest rates. And also ask about how to determine the best strategy for finding the still available “great deals” that may be hidden from the average home shopper. To prepare for your in-home evaluation you should also ask for a Special Report titled: 27 Valuable Tips You Should Know To Get Your Home Sold Fast and For Top Dollar.
About the author: Ira Miskin is Market Area President for Optimus Real Estate Brokers. Ira is available for private consultation by appointment by calling 770-672-7832.