Interest Rates: The Federal Reserve has finallymade its first move and raised the short term rate for the first time in nine years.
The Federal Reserve in December 2015 raised the short term rate .25 of one percent – first increase in 7 years.
The reason the world sees a rise in our rates as something good is because it indicates that the Federal Reserve has faith in the U.S. economy.
An increase of a quarter of a point will not drastically change the monthly mortgage payment.
However, as rates continue to climb, it certainly will put a dent in a borrower’s wallet. Remember, this is a monthly payment. So, for a $750,000 mortgage payment, the payment increases $109 per month every single month when the interest rate rises by just a quarter of a point. That’s an extra $1,308 per year.
If the Fed continues to increase rates, we could find rates rising to 4.75% by the end of 2016. If that happens, the monthly mortgage payment for a $750,000 mortgage climbs by an extra $331 per month compared to today, or nearly $4,000 a year. That’s a lot of money.
For a $500,000 mortgage at 4.75%, the monthly payment increases by $220 per month compared to today, or $2,640 per year.
Historically speaking, 4.75% and 5% are still good rates. We are accustomed to ridiculously low rates complements of the Federal Reserve stimulating the U.S. economic engine for nearly a decade.
The long term average for interest rates since 1972 is 8.5% and since 1990 it’s 6.6%. Eventually, down the road, interest rates will hit 5% and beyond, most likely topping at around 5.25%. For the $500,000 middle class borrower, a 5% interest rates means an extra $296 per month more compared to today.
Now is the time to take advantage of today’s rock bottom rates. They might not be as low as they were earlier in the year, but the gift from the Federal Reserve is coming to an end.
By Harrison K. Long. Source of information is ReportsOnHousing by Steven Thomas.