How Higher Interest Rates Affect Your Buying Power

0b24c2 5a7d07f770334d26a948d0611f9cd597mv2

While mortgage interest rates remain near historic lows, they’ve been steadily rising over the past few years, and experts agree they’re headed in one direction: up. So what does this mean if you’re planning to buy a home?

0b24c2 b23ca69cb4584ba195666fd4947fb146mv2

As rates go up, the amount of home you can afford goes down. For every 1.00% increase in interest rates, your buying power decreases by about 10.00%.

For example, let’s say you can afford $1,252 on your monthly principal and interest payment. With a 30-year fixed loan, a 20% down payment, and an interest rate of 4.75% (assumed annual percentage rate [APR] of 4.87%*), you could borrow $240,000 to purchase a $300,000** home.

But if rates go up to 5.75% (APR 5.88%*), the amount of home you can afford decreases to $268,100**, causing you to lose $31,900 of buying power. That’s a lot of buying power!

Here it is broken down:

0b24c2 e5fa1e04e85e4673ab15f9467ed28d21mv2

 

Think of what that buying power could translate to — a better neighborhood or school district, a turnkey home that requires little to no renovation, a larger space for your growing family? An increase in rates could cause you to lose out on those opportunities.

0b24c2 63c3a1912f054275917b53e3fb2650c3mv2

A higher interest rate also means you’ll spend more money on interest over the life of your loan, causing you to pay more for your home in the long run.

Bottom line? Don’t delay! Buy a home now before rates climb even higher.


 

We are not financial advisors. You should consult a financial advisor to devise a financial strategy that works best for your situation.

*Annual percentage rate (APR) is based on 1% origination fee and $1,000 in other fees . For example only. Monthly payment reflects principal and interest only. Program rates, terms, and conditions are subject to change at any time and may vary based on borrower’s credit history.

**The following is for example purposes only. Example loan scenario: If borrower with a 680 FICO score and 33% debt-to-income (DTI) ratio purchases a home at $345,000, provides a 20% down payment (loan amount $276,000), and obtains a 30-year fixed rate mortgage with an interest rate of 4.750% (assumed APR of 4.870%*), the repayment terms would include a monthly principal and interest payment of $1,440. Does not include applicable taxes and insurance. The actual obligation will be greater. All loans are subject to credit and property approval. Certain restrictions may apply.