How Do Rising Interest Rates Affect My Purchasing Power?

April 13, 2018

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With interest rates on the rise, buyers have been asking, “How do higher interest rates really affect my monthly payment?” The answer might surprise you.

In this example, we’re starting with a $300,000 loan amount on a 30-year fixed mortgage. At a 3.75% interest rate, the monthly payment would be $1,389.00 (lower left-hand corner of the chart below). As the interest rate increases to 4.75%, notice how the mortgage payment increases to $1,565.00. That’s an increase of about 12.7%. Most purchasers can only afford a certain monthly payment, however, so as interest rates rise their purchasing power decreases. The chart below shows how much house you can afford as interest rates rise while keeping the monthly payment roughly constant. As a rule of thumb, every 1% rise in interest rates decreases your purchasing power by over 10%!

It’s not all bad news, however. Today’s rates are still near half their historical average of over 8%. That provides continued opportunity to lock in very low rates, even if they are higher than in recent history. The days of sub–4% interest rates are behind us for now, so maximizing your down payment is a vital component to keeping your payment as low as possible. This is why having an experienced mortgage lender on your team is key to your home buying success. They can help you organize your finances, such as paying down high-interest credit cards or selling off assets, before you lock in your loan in order to secure the lowest rate.

Real estate agents are frequently asked, “when is the best time to buy a home?” and the answer is usually “right now.” With rates on the rise, they are not wrong. Locking in what are still historically low rates saves you money in the long term, especially in a low volume market like Austin and the surrounding areas where demand is high. In a seller’s market, housing inventory can drop even faster when interest rates rise as buyers rocket off the fence to lock in low rates. But fear not! The selling season is upon us and inventory is likely to increase.

Be careful rushing to buy a house in order to simply get the lowest rate. Remember that real estate, in most cases, is a long-term investment that you’ll want to hold on to for at least 5–7 years. Finding the right property for you and your family can save you thousands over the life of your loan. The interest rate is only one of the factors that come into play when purchasing a home. Monthly expenses go up when there are a ton of repairs to be done, such as replacing a roof, leveling a foundation, or dealing with termite damage. Contact Hope Realty Texas Team today to get more information on the right buying options for you.