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Impact of Eventual Fed Rate Hike

Homebuyers get reprieve this time

Sept. 18, 2015

By Chattanooga Times Free Press - Tribune News Service

Homebuyers were granted a reprieve to lock in today's relatively low mortgage rates with the Federal Reserve's decision not to raise interest rates this month while the global economy shows weakness and inflation is under the Fed's targeted rate of 2 percent.

"Those planning to get into the housing market in 2016 may want to consider a home purchase before the end of the 2015," said Jonathan Smoke, chief economist for "When rates go up, not only will monthly mortgage payments increase, that increase will also lessen some buyers' ability to get approved for a home loan -- due to an increased debt-to-income ratio."

Smoke did an analysis of loan-level data from Optimal Blue, an enterprise lending services platform, and predicted that if the Fed boosts interest rates by 50 basis points over the next year, mortgage payments are likely to go up by 6 percent on new home loans.

In May, the average loan with a 30-year fixed mortgage was $231,000, which had a monthly principal and interest payment of $1,107 at the average interest rate of 4.03 percent. When rates reach 4.53 percent, that same loan amount would result in a monthly payment of $1,175, an increase of 6 percent.

The higher monthly rate is expected to crowd out some would-be buyers and the Chattanooga, Tennessee, housing market could be one of the top 10 hardest hit markets with up to 10 percent of new homebuyers priced out of a home purchase (at least of the same price now paid) if rates go up by that 6 percent effective cost, according to Smoke's study.

"High cost markets and markets where first-time buyers have been just barely able to qualify this year are most at risk of seeing more failed mortgage applications as a result of higher debt burdens triggered by higher rates," Smoke said.

Travis Close, president of the Greater Chattanooga Association of Realtors, said the Fed's decision to hold off on raising rates "was definitely good news" and gives prospective home buyers a bit more time to jump into a favorable market before rates likely rise by the end of the year."

If you are unsure if you want to buy now or wait a couple of months, you might want to think about sooner rather than later," he said.

But Close said he doesn't expect a gradual rise in interest rates to significantly harm the housing market.

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