Peaks and Troughs in the Mortgage Interest Rate Market
In all forms of markets, there are times when the price is high and when the price is low. This is similar to the commodity markets where sometimes the good can be expensive and sometimes the good can be cheap based on demand. The same is true for mortgage interest rates. The interest rate during lowered demand times can be very low; however, when demand for mortgages increase, then the interest rates must increase as well to decrease demand in mortgages. Mortgage rates have ranged as low as 3.2% to rates as high as the high teens in the early 80s.
What does this mean in terms of Mortgage Payments
When looking at a mortgage payment, most real estate agents will try to get you to but the most expensive house possible. This will ensure that they are able to achieve the highest commission possible. Whereas if they sold you a property that was within your present and future budget, then your finances will be better in the long run.
Let’s look at how your mortgage payments will change based on a $350,000 mortgage:
Mortgage Size: $350,000
Amortization: 35 years
Interest Rate: 3.5%
Monthly Payments: $1446.52
In the next example, we will use the same numbers; however, we will increase the interest rate to 5.8% the same rate 5 year fixed rates were at 6 months ago:
Mortgage Size: $350,000
Amortization: 35 years
Interest Rate: 5.6%
Monthly Payments: $1902.55
This is a dramatic $450 increase in payments which could result in monthly payments that are not feasible for your family.
The next example shows if there is a bigger increase, but not a dramatic increase in interest rates:
Mortgage Size: $350,000
Amortization: 35 years
Interest Rate: 7.5%
Monthly Payments: $2349.55
This is almost double the initial payment the person had originally. If there income has not doubled in the household, then they may face the requirement to sell their house or foreclosure, and this is not even a dramatic change.
Let’s look at the final example where a dramatic change in interest rates occur. This final example shows if interest rates went into the high teens:
Mortgage Size: $350,000
Amortization: 35 years
Interest Rate: 17%
Monthly Payments: $4971.84
This is a dramatic increase and is over 3 times what the original payment is. The majority of the people who had received a mortgage at the rates of 3.5% would be facing foreclosure. This would be in a time of a serious recession and very few people would be able to make it through these troubling times.
What can I do to Protect myself from Foreclosure?
It is easy for a family to go and get qualified for a property that is barely within there pay scale because the real estate agent, the mortgage broker, and many other parties in the process will promote this; however, doing what is best for you is always what you should be concentrating on.
When trying to figure out what mortgage amount is within your price range, then it is best look over the numbers yourself. Do several hypothetical situations where interest rates increase and calculate your budget to make sure that you can survive with that property.
If you do not take the time to run through the numbers, then even well-off individuals could be facing foreclosure and personal bankruptcy if things go wrong.
While everyone is trying to force you into the biggest home possible, you should be looking for a house that has prudent payments, and put the extra money towards the principle balance of your mortgage.
If you were originally looking for a bigger property, then once you have paid down your original balance, you can look into upgrading your property if the market conditions are positive for you to upgrade your property. If the market conditions are negative, then you can still wait for a better time to make the move.
By being prudent today, you can prepare for any market that the future has in store for you and your family. If the market goes up, down, or stay’s the same, then you will be prepared and you will not need to be concerned about the market fluctuations.
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