Buying a Home or Selling, Here's Why You Must Act Now
NEW YORK (TheStreet) -- Homeowners who've wanted to sell should be cheered by recent news of rising home prices, easier lending terms for buyers and general economic improvement that encourages house hunting.
But the silver cloud has a dark lining: Rising interest rates can undercut home prices.
Like buyers, who need to get a move on before rising rates make homeowning more expensive, sellers should be careful not to wait too long. Rising mortgage rates are hardly a crisis, as they're still low by historical standards, but prospective sellers should keep the rate and price relationship in mind as they plot their strategies.
Unfortunately, it's impossible to say the exact effect on prices of a 1, 2 or 3 percentage point rise in mortgage rates, as so many factors affect home values. But the principle is simple enough: Rising rates make monthly payments bigger, reducing the maximum buyers can spend. That, inevitably, affects prices to some degree.Maximum Mortgage Calculator provides one way to look at the price/rate relationship. With the default inputs, a person with a $4,000 monthly income could afford a monthly payment no higher than $805. That would support a $134,267 mortgage at a 6% rate. Change the rate to 4.5%, about today's level for the 30-year fixed-rate loan, and the maximum mortgage jumps to $158,876. So, if rates were to rise from today's 4.5% to 6%, a level that has been common in the past, this buyer would have $24,609 less to spend. Looked at another way, a 1.5 point increase in mortgage rate would reduce this buyer's buying power by about 18%.
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