Buying Boston Area Real Estate: What Higher Rates Will Do

If you’re looking to buy Boston area real estate in the next year, you might want to do so before higher interest rates make financing such big-ticket purchases a lot more expensive. The Federal Reserve, which controls the supply of U.S. dollars and short-term interest rates, has indicated that it could start raising rates as soon as June.

Here is how much more Boston area real estate will cost when mortgage rates rise

Mortgage rates for those buying Boston area real estate have been so low for so long that people might have forgotten what it’s like to pay “normal” mortgage rates of 6 percent to 8 percent for a home mortgage. But if rates rise, the impact will be felt by nearly everyone trying to buy Boston area real estate and even those trying to sell their home as well.

How Boston Area Real Estate Will Cost More

When applying for a mortgage, lenders will assess your ability to pay back the loan based on your income and the monthly mortgage payment. The higher your income, the larger the allowed payment, but interest rates play a big role in how large the payment will be. Even a slight rise in historically low interest rates could make it a lot more expensive.

A 1-percentage-point increase in mortgage rates from 4 percent to 5 percent on a 30-year mortgage results in a 13 percent jump in monthly payments. A 2-percentage-point increase results in an incredible 26 percent increase in monthly payments.

The reason those higher payments are important is that they play into how much borrowing power you have. A lender is trying to figure out how much it can loan you and still expect you to pay it back on time, but the lender doesn’t necessarily care how big the loan is. What it really cares about is whether you can make the monthly payment.

Why Boston Area Real Estate Could Suffer

Mortgage rates and borrowing power could have a profound impact on the Boston area real estate market that’s still recovering from the recession.

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It’s no secret that wages haven’t risen much at all recently, so recently the improving Boston area real estate market has been driven by the borrowing power that low interest rates have provided rather than extra income from higher wages. If interest rates rise, even slightly, they could actually send home prices — and home values — lower, simply by reducing the ability of new buyers to pay for a home.

If you buy any Boston area real estate with 20 percent down and then sell it a few years later but can only get 90% percent of the price you paid, your loss is half of your down payment. That’s a big loss on an asset that people don’t usually expect to lose money on.

It’s not a question of IF higher mortgage rates are coming, it’s a matter of when. And no one really knows the answer to that question. With the economy and unemployment improving, the market is currently betting that the second half of 2015 will start to see higher mortgage rates, and consumers should know how it could impact them.

Higher mortgage rates mean lower borrowing power, so whether you’re thinking about buying or selling Boston area real estate, you might want to start thinking about how those changes will impact you in the future.

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