MANHATTAN — When buying a home, affordability comes down to your monthly payments — which means rising mortgage interest rates can sometimes make or break a deal.
After the Federal Reserve raised interest rates last month by 0.25 percent, mortgage interest rates rose to their highest level in 2016. And since the Fed has suggested it will raise rates again in 2017, many prospective buyers are bracing for mortgage rate hikes, too.
As of Jan. 11, interest rates were 4.2 percent for a 30-year mortgage and 4.24 percent for a 30-year jumbo mortgage, which applies to loans of $625,500 or higher in New York City, according to Bankrate.com.
“Rates are still historically low so now is as good as a time as any to pursue a new home,” said Neil Garfinkel, of Abrams Garfinkel Margolis Bergson, LLP, where he’s in charge of real estate and banking practices, and who also serves as broker counsel to the Real Estate Board of New York.
He advises buyers to set a “realistic purchase price target that is in a range that is comfortable” — and then stick to the plan. Buyers should also have their team ready — real estate broker, attorney, inspector and bank lender — so they’re ready to act quickly if they find the right fit.
Here's how rising rates could affect the city's market.
1. Rising rates could lead to price drops.
Mortgages are more common for first-time buyers, entry-level apartments and neighborhoods where there’s generally more affordable housing stock, experts said.
So, for these segments of the city’s market, there may be a decrease in qualified purchasers, at least initially, Garfinkel said.
“However, at some point sellers become more realistic about the pool of qualified purchasers and this can lead to sellers reducing their selling price,” he said. “This can lead to an increase in purchase activity.”
Zach Ehrlich, of Mdrn. Residential, agreed that rate increases will lead to more sales eventually as the spread between asking and bidding prices decrease.
“Pricing in the affordable bracket will correct, but slowly,” he said. “More buyers will lock in and pull the trigger given the upward trend of rates.”
Don’t expect changing rates to make a dent in the already softening luxury market, Garfinkel noted.
“At the higher end of the market, many purchasers do not rely on mortgage financing and this initial increase in mortgage rates should not affect this segment of the real estate market,” he said.
2. The size of the rate hike, obviously, makes a difference.
An increase of a quarter of a point won’t likely affect his Brooklyn buyers, said Erik Serras, of Ideal Properties, whose recent market report found the median sales price of Brownstone Brooklyn and North Brooklyn was around $1 million in the fourth quarter of 2016.
If a buyer puts 20 percent down on an apartment and gets a loan for $800,000 at a 4 percent interest rate, the monthly payment for the principal and interest would be $3,819 a month. The same loan at a 4.25 percent rate would yield a monthly payment of $3,936 a month.
That’s a difference of $117 a month.
“If you’re buying a $1 million dollar home, even a quarter of a point isn’t going to dramatically change your lifestyle,” Serras said. “Buy a few less coffees at Starbucks that month.”
But a point difference could be a deal breaker for many buyers.
Going from 4 to 5 percent would result in a difference of nearly $500 a month, according to a Zillow mortgage calculator.
That might be the “tipping point” between what’s affordable and not in terms of the rent versus buy calculus, explained Krishna Rao, who is a StreetEasy economist.
“Because homes in Manhattan are so expensive, interest rate increases can have a huge impact on monthly payments,” Rao said. “These higher monthly payments would also increase the ‘tipping point,’ or, number of years it takes for buying to make more financial sense than renting, making a home purchase even more unattainable for the average New Yorker with prices and rents unlikely to adjust quickly.”
3. Those who can pay in cash might make out best.
Foreign buyers or other cash-rich buyers might benefit most.
“Historically, rising interest rates also shift the market even more in favor of international buyers,” Rao said. “These investors are often paying in cash, and therefore aren’t impacted by interest rates.”
For buyers who can build up cash reserves, it might behoove them to wait before buying, Ehrlich said, as prices might dip as rates go up.
“It’s better to lock in 4 percent today than be stuck at 5 percent if you’re a buyer that needs 70 to 80 percent financing,” he said. “But there’s some benefit to waiting. If you can put down 40 to 50 percent two years from now, then you should wait. If you are cash rich, you’ll have far more opportunities in 2 or 3 years.
4. Rising rates also might help ease tight credit conditions.
Even though rising rates might reduce affordability, the rates indicate that the economy is trending to a better place, said real estate expert Jonathan Miller.
And higher rates can help normalize credit standards.
“Tight credit is still distorting the market,” he said.