READ TIME: 3 Minutes

Key Highlights:
– Rates are the highest compared to the last 4 years
– How much can a 1% rate increase affect you?
– Who is affected the most during rate increases
– Why are there so many buyers!

All good things come to an end, even our 4-year low mortgage interest rates. Over the past year, we’ve seen rates steadily rising and are positioned to climb even higher through 2018.

One thing to consider is that when rates rise, the cost of buying a home rises as well. This creates a few challenges for today’s Los Angeles buyers, particularly first-time home buyers as they are forced to settle for smaller homes, fixer-uppers or into neighborhoods that may be a bit more distant than they’d prefer.

Worst of all, buyers may even be priced out of this Los Angeles seller’s market altogether with soaring home prices and increasing rates.

After seeing historic lows in rates, average mortgage rates have risen to their highest levels in more than 4 years. Reaching an average of 4.43% as of March 1st according to data provided by Freddie Mac. (Click here to see weekly interest rates since the beginning of 2018.)

The Federal Reserve plans on raising short-term interest rates with gradual increases of 0.25% at least three times this year, starting in March! Although mortgage rates and short-term rates are separate, history shows that mortgage rates usually follow any increases from the Federal Reserve.

The Federal Reserve plans on raising short-term interest rates with gradual increases of 0.25% at least three times this year

 

Lets put things into a mathematical perspective:
If you are buying a $700,000 house in Los Angeles with a 30 year fixed mortgage and are putting a 20% downpayment.

At a 4% interest rate, your monthly payments are around $2,674
At a 5% interest rate, your monthly payments are around $3,006
That’s a difference of $332 per month!
Multiply that over 12 months for the year and that’s $3,984!
Multiply that over 30 years and that’s $119,520!
Now that’s a lot of money and this is only because rates went up 1%!

 

What does all of this mean?

Even with the rising rates, this won’t stop buyers from purchasing homes. If anything it will cause more of an urgency for home buyers where we may see more people competing on homes creating more multiple offer situations.

One thing to remember is that although rates are rising they are still relatively low compared to what mortgage rates were from the 1990s through the financial crisis, falling from a high of 18.63% on October 9th, 1981. They dropped below 5% for the first time in March 2009, before bottoming out at 3.1% on November 21st, 2012. While mortgage rates may not return to the 3% range anytime soon, it’s also unlikely that they’ll rise up to double-digit percentages.

“We’re not going back to the levels of 10 years ago,” in the mid-5% to mid-6% range, says Len Kiefer, deputy chief economist for Freddie Mac.

First-time home buyers have the most to fear from rising mortgage rates

First-time home buyers and others who are working on a tight budget are likely to be affected the most. With a 1% increase in mortgage rates that equates to 5% of buyers who are priced out of purchasing a home according to a 2016 John Burns study.


Who are the buyers currently purchasing?

There is a huge backlog of buyers eager to purchase as most held off from purchasing during the recession due to the worries of job stability or affordability of purchasing. As the economy got stronger these buyers are entering the market in flocks. A lot of older millennials are starting their families or expanding and need more space.


Ashraf Spahi is a Los Angeles Realtor specializing in helping home buyers find their dream home. If you would like any assistance you may reach me at (323) 673-0041 or Ash@VividAgent.com