Know Your Purchase Power
JANUARY 30TH
How Interest Rates Affect Purchasing Power
High-interest rates can have a number of effects on the housing market, including your ability to get approved for a mortgage, the supply of homes on the market, and home prices in general.
New buyers may not be aware of how interest rates affect their purchases. Here are some ways that your home purchase can be affected by interest rates.
Increased rates decrease buying power
Rising mortgage rates can have a significant impact on your buying power. A 1% increase in rates can add hundreds of dollars to your monthly payment and make it difficult to qualify for a loan in the first place. As a result, you might be forced to purchase a less expensive home or wait until rates drop before entering the market.
Finding a home in a lower price range means you might have to compromise and look at homes that are in a less desirable neighborhood, in need of repairs or upgrades, smaller than you planned for, or without the amenities you want
If you don’t want to compromise, you can wait until the market shifts while working on your qualifications as a borrower: You might try to come up with more money for a down payment, increase your credit score or improve your debt-to-income ratio to qualify for a better mortgage.
How does a 1% rate increase affect what you can afford?
A slight rate increase might seem minor, but this small increase in your monthly payment can add up over time and affect your buying power.
If you look at a borrower with a monthly income of $4,500 and a debt-to-income ratio of 36% who makes a 20% down payment, even a quarter of a percent increase can mean they’ll be able to afford roughly $12,000 less over the course of a fixed, 30-year mortgage. With a 1% increase, the price of a home they can afford drops by more than $45,000.
If you are in an area where the average home sells for $1,000,000, and you are pre-approved for $1,000,000 a 1% increase in interest rates would lower your purchase power and put you beneath the average price for homes in your market.
This could cause you to wait to buy, influence you to buy in a different neighborhood, or buy a home that needs work or does not meet your criteria.
When is a good time to buy a house?
Mortgage interest rates change daily, and picking the right time to buy a house depends in large part on your personal financial situation.
Overall, if you can afford a mortgage with the current interest rates and you find a good deal on a house you like, now is a good time to buy a house.
If the house you want is outside of your budget because of your current finances and the market today, it might be a better idea to wait until the rates are lower or save up more money to increase your down payment.