Interest Rates Expected to Continue Rise

Excerpted from May 26 Washington Post: Rates on 30-year mortgages jumped to their highest level in seven months as prospects diminished for Federal Reserve rate cuts any time soon, reflecting concerns in financial markets that inflation worries will keep the Fed from cutting rates in coming months.

Frank Nothaft, Chief Economist at Freddie Mac, said he was looking for a gradual rise in mortgage rates the rest of the year…and looked for housing to stage a recovery beginning at the end of this year, with a modest increase in both sales and home construction in 2008.

30 year fixed rates now average 6.37% nationwide. Let’s keep this in perspective though. Take a look at the long term average rates:

Source: Long & Foster
Information deemed reliable but not guaranteed.

So, in the big picture, rates are still extraordinarily low. Let’s use a real life example: take a $500,000 loan (more than the average condo in Arlington, but we’ll use it because it’s a nice round number). A borrower with a 30 year fixed rate loan of 6.35% has a Principal & Interest (P&I) payment of $3,111/month. Let’s say rates continue to go up–at 6.45% that same loan has a P&I of $3,144, a difference of $33. Of course $33/month adds up over time, but if that $33 is make-or-break in your budget, then you should NOT be buying a house in that price range anyway. If rates go all the way to 7%, then we’re talking $215/month, so that gets to be a bit more significant in the monthly budgeting process. I guess what I’m saying is to not panic when you read rates are slowly going up…a small tick in prices should not impact your go/no-go decision in a home purchase, and if it does, then you need to be looking in a lower price range.

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