Mortgage Interest Rates and Purchasing Power

You know that rising mortgage interest rates impact home purchasing power. But what does that actually look like in terms of dollars and cents? 

Let’s check out a few examples to find out! We’ll be using the term “basis points” to refer to the increases. 

Impact of a 50 Basis Point Increase

First up, let’s check out the impact of a 50 basis point (0.50) increase. We’ll do two examples. 

Example 1

Our buyer can afford to pay approximately $1,910 per month for a monthly mortgage

If interest rates are at 4%, they can afford a home priced up to $500,000 with a 20% down payment. 

But if interest rates are at 4.5%, in order to stay at a monthly mortgage of $1,910, they can only afford a home priced up to $470,000. That’s $30,000 of purchasing power lost. 

Example 2

Our buyer can afford to pay approximately $2,864 per month for a monthly mortgage. 

If interest rates are at 4%, they can afford a home priced up to $750,000 with a 20% down payment. 

But if interest rates are at 4.5%, they can only afford a home priced up to $705,000 in order to stay at a monthly mortgage of $2,864. That’s $45,000 of purchase power lost. 

Impact of a 100 Basis Point Increase 

Now, let’s look at the impact of a 100 basis point (1.0) increase. We’ll again use two examples, with the same monthly mortgage limits as noted above.  

Example 1

If interest rates are at 5.0%, the buyer can only afford a home priced up to $445,000 in order to stay at a monthly mortgage of $1,910. That’s $55,000 of purchasing power lost compared to a rate of 4.0%

Example 2

If interest rates are at 5.0%, the buyer can only afford a home priced up to $665,000 in order to stay at a monthly mortgage of $2,864. That’s $85,000 of purchasing power lost compared to a rate of 4.0%

Interest Rate Changes Work Both Ways

The information above may be quite sobering. But remember that the opposite is also true. For every basis point that interest rates decrease, that in turn increases your purchasing power. 

This is why it’s so key to stay on top of what’s happening with interest rates. Doing so will position you to take advantage when they drop. Even in the midst of today’s higher interest rate environment, rates have dropped from time to time

How Can You Manage Rising Interest Rates? 

Although you can’t control how much rates rise, there are steps you can take to help manage them so that you get an optimal rate. 

I did an Instagram Live session with a mortgage professional where we discussed the best tactics. You can get a replay link that you can watch anytime by signing up for my monthly email newsletter.

Click here to get on the list and get the link!

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