Wednesday, January 6, 2016

What Do the New Mortgage Rates Mean When Building Your New Custom Home?

Rates have already inched up slightly by 0.25% in a decision by the Federal Reserve System in December. This is the start of a trend that will gradually continue in the future, as our country’s economy continues to improve. This marks the end of the near-zero borrowing costs that have prevailed in recent years, and it’s good for investors, but not so great for homebuyers. What do these rate increases mean if you plan on purchasing a new home this year? We’ve broken it down in a few examples of what the cost will be to those who wait to buy their homes and rates continue to increase.

The average mortgage rate for a 30-year fixed has been around, or just below 4.0%, which is what we will use in our example. An average mortgage amount of $300,000 at 4.0% will cost the homebuyer $1,432.25 per month for principal and interest. The difference in the monthly payment for 0.25% increase in the rate (to 4.25%) is $43.57 per month, or $522.84 per year. Not a significant difference, but there are a lot of things you can do with $500.00 extra per year. When you add it up over the life of your 30 year loan the total is $15,685.30.

Since the Federal Reserve has promised to continually increase rates, the longer you wait, the higher your monthly payment and cost to borrow money for a home becomes. Because we don’t know for sure when these gradual increases will happen, it’s hard to predict exactly when the right time to buy a home will be. Of course, the sooner you make your decision, the better you will do on your interest rate. For example, the same $300,000 mortgage amount at a 5.0% fixed rate will increase to $1,610.46 per month in principal and interest. That’s a difference of $178.21 per month. Only 1% difference in the rate and you are paying over $2,000 more per year for your mortgage. That could be a nice, modest vacation. Over 30 years that is $60,000 – a lot of nice vacations!

The same mortgage amount at 6.0% interest is now $1,798.65 per month, or $366.40 per month more in Princeton and interest on your payment. That’s $4,396.80 per year. Over the life of a 30-year mortgage that’s a grand total of $131,901! That’s enough money to finance a college education, or even a few years of retirement. It doesn’t sound so bad when you are talking about a quarter-of-a-percent, or even 1-2 percent higher than today’s rates. But when you start to do the math it really adds up over the length of the loan.

Our best recommendation is to seek the advice of your financial professional, talk to your mortgage representative, and do your research before you apply for your mortgage. We know that now is the perfect time to build your new home, before rates continue to inch up. RBA Homes continues to be one of the premier custom modular homebuilders in Monmouth and Ocean Counties, since 1986. We would love the opportunity to provide information to help you make your new home decision. Contact us today for more details on how to start building your new home on your property or ours.