What Happens When Mortgage Rates Rise

As we mentioned in our last post, we are expecting mortgage rates to increase. Also, we know that there are a lot of people waiting for prices to go down before they purchase. Kathryn and Holly at Yampa Valley Bank put together an example of what increasing rates do to the cost of home ownership.

For a loan amount of $240,000 and a purchase price of $300,000 with 20% down
The principal and interest payment at 5% is $1,288.37.

If the rates increase to 5.5% the same payment ($1,288.37) would result in a loan amount of $226,910 or $13,000 less. With 20% down this is a purchase price of $283,635.

If the rates increase to 6% the same payment ($1,288.37) would result in a loan amount of $214,890 or $25,110 less With 20% down this is a purchase price of $268,612.
(This is a purchase price drop of 10%)

Since rising interest rates occurs after inflation has entered the economy, a quick look at our past post - WHAT HAPPENS TO HOME PRICES WHEN INFLATION RISES? - tells us about the historic relationship between prices and interest rates. In summary, history tells us that once inflation enters the economy, it has been good to be a property owner.