When Does 1% = 12.5%?

Is this an example of “Modern Math”? 1 % can be a BIG number in the Real Estate industry, as well as in the Home Lending industry.  As the economy improves (and this last quarter’s 4.1% increase in the Gross Domestic Product (GDP) indicates that it is), home loan interest rates are expected to go up. The 30 year home mortgage averaged 4.53% in July 2018, as reported by the Federal National Home Loan Mortgage Corporation (FREDDIEMAC). That number compares with 3.97% a year ago in July 2017. That is a full .55% higher than it was just one year ago, before the economy seemed to start revving up.  It could easily go up another .5% in the next six months, as long as the economy continues to perform at or near its current pace.  

How much of a difference in housing payment would a 1% increase in the interest rate represent to a Diamond Bar home buyer?  The Median Sales Price (MSP) of a Single Family Residence (SFR) in Diamond Bar reached  $735,000.00 for the last quarter including sales from April through June 2018. Assuming the purchase with a 20% down payment, and the monthly interest rate of 3.97%, the 30 year fixed rate conventional mortgage would have a monthly payment of $2,797.00.  Projecting another .5% interest rate increase, a similar mortgage in the amount of $588,000 with a fixed rate at 4.97% (1 % higher than July 2017’s) would have a monthly principal and interest payment of $3,145.00, a difference of $348 per month, representing an increase of 12.5% in the payment as a result of the higher interest rate.

This is a case where 1% (increase in mortgage interest rate) equals 12.5% (increase in payment)! The risk of missing out on the lower interest rate is causing many buyers who have been sitting on the sidelines to “get off the fence” and buy.

This article was written by Nef Cortez who is a licensed Real Estate Broker, Ca DRE lic # 00560181, licensed since 1976. He can be reached for more information via e-mail at nefcortez@gmail.com, or website www.nefcortez.com. Please feel free to email any questions regarding real estate.