How mortgage rates affect buying power

You’re thinking about buying a home (or selling your current home). You’ve heard that ‘interest rates are going up’. But what does that really mean to you?

While we are very clear to defer all lending questions to mortgage professionals, you don’t need to be loan officer, or a math geek, to figure out how much a change in interest rate affects your monthly payment. Of course, you can just ask your lender for the difference. Or you can use one of the many mortgage calculators out there.

But having a very simple rule of thumb would help put it in perspective. So here’s is your basic cheat-sheet:

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A difference of 1% in interest rate changes your purchasing power about 11%.

That means that if today you can afford a $200,000 house, and interest rates go up 1%, now you can afford a $178,000 house. Or, to look at it another way, if your monthly payment would be $1000, after rates go up 1% your payment would likely be over $1100. This is assuming that there are no changes to your credit, down payment, loan type, the property taxes or any other factors.

Here’s a chart to help visualize:

Rates don’t go up 1% at at time, of course. The Federal Reserve changes the ‘benchmark federal funds rate’—the rate that financial institutions use to lend money to each other—usually a quarter percent at a time. And this has a cascading effect for mortgage rates, car loans, etc.

Advice for buyers in 2018

If you’re thinking about buying a home, and are able to do so, do yourself a favor and buy sooner rather than later, before interest rates go up again! Waiting is literally costing you money in higher mortgage payments, or costing you in terms of how much house you’ll be able to buy.

Advice for sellers in 2018

Does this affect you if you’re selling your home, but not buying? Absolutely! Because the higher rates go up, the fewer the buyers who can afford your house. Get your house on the market while you’re still in a seller’s market and there are plentiful buyers taking advantage of low interest rates.

Contact us

Call us at the Vaz+Harwood Team to discuss selling or buying your home. If you need a referral to a wonderful mortgage loan officer, we can refer you to several trusted companies that our buyers have been extremely happy with.

What do you want in your next home?