There is often a certain degree of panic in the real estate world when mortgage interest rates begin to rise. Let’s take a look at some reasons why interest rate increases are NOT the end of the world.
Homeownership Benefits Out-Weigh Slight Increases in Payment/Interest Rates The first and foremost reason we shouldn’t fret about interest rate increases is that even as much as a $150 increase in a mortgage payment is peanuts as compared to the benefits and financial gain homeownership provides. Owning your home also provides the freedom from the confines of being a tenant, such as not being able to choose paint colors or having to move at the landlord’s mercy when leases expire. Financially, tenants are missing out on equity growth, tax advantages and payment stability. It is a fact that an average priced home in Maricopa County could provide a financial benefit of over $90,000 when compared to renting a similar type dwelling. The chart below breaks down the make up of that benefit.
Here’s the Actual Damage (Extra You Will Pay) Now let’s look at exactly how much rate increases will affect mortgage payments. With all else even, the following shows the affect an interest rate change will have on a standard 30-year amortized monthly mortgage payment.
This could equal as much as a $20,000 - $30,000 price change. The range is due to how each payment difference will be different at every price change; however, it is a very slow and gradual upward scale. In other words, lower priced homes actual prices will have smaller differences than higher priced homes.
Interest Rate Increases Slow the Market Another advantage is that interest rate increases, from a pure economic stand point, will slow the market. As a buyer, this is good news. It would be less beneficial to purchase a home when interest rates are low and money is more available. This is true as such will give seller’s a larger buyer pool to choose from. Supply and demand principles then take over and prices go up because demand is greater. This is compared to buying when the market is slowing and less buyers are available for the same amount of houses listed for sale.
More Interest to Write-off on Your Taxes Simply stated, the more you pay in mortgage interest, the more you will be able to write-off. This is money back in your pocket. The extra you will pay in interest each month isn’t as bad as it seems because it will help your tax bill.
To summarize, there are many reasons why interest rate increases aren’t as bad as they may seem, especially if you are a buyer. The main point to understand is that interest rate increases are not a reason to continue renting and not pursue homeownership.