Many people are rushing into the housing market due to FOMO (Fear of Missing out) and there could be some BIG consequences when interest rates go up. There is a good new bad news scenario to buying right now and everyone in the housing market needs to know what to expect. Before you rush in, here is the good and the bad to buying right now.
The good news about low interest rates staying on the horizon for the long term is that we will have more of our money going towards principle versus interest payments than if interest rates were higher.
Let’s use an example:
With a $367,200 mortgage, a conservative 4% interest rate and a mortgage amortized over 25 years, your payments would be roughly $1,940monthly. Your property taxes, heat insurance, lawn gnomes, wheelbarrow are all on top of that so make sure you crunch the numbers. Adding them all up can really increase your payments, especially if you’re buying a condo with maintenance fees.
Let’s look at a chart to see what your payments could be on the same mortgage as interest rates go up.
$367,200 at 4% = $1,931.55
$367,200 at 5% = $2,135.65
$367,200 at 6% = $2,349.37
As you can see in the chart, a modest 2% hike in interest rates results in a $417.82 increase in payments and over $120,000 more in interest. Ouch!
If you only barely got approved in the mortgage at 4% you wouldn’t be able to afford to make the payments at 6% when they are $417.82 a month higher. Someone who is just starting out and is anxious to get on the real estate ladder might have a problem living once they have to make another$417.82 payment each month. Make sure you can afford the home at an average of 5-6% so when markets go up you can still afford them. If it looks like more than 1/3 of your AFTER tax income is going to be going to a place to live. Don’t buy it. You’ll thank me for it later!
Or you can contact us and get your mortgage pre-approved so you will know if you are ready for a mortgage(Link).
Original article: http://www.huffingtonpost.ca/david-lester/buying-new-home-fomo_b_9720508.html
