When it comes time to buy a home, it’s critical to understand the relationship between current mortgage interest rates and your purchasing power. Your purchase power is the amount of home you can afford to buy that’s within your financial reach, and mortgage rates directly impact the monthly payment. As interest rates change, so does the monthly payment you’re able to lock in on your home loan. In a rising-rate environment like we’re in today, that could limit your purchasing power.
At time of this writing, the average 30-year fixed mortgage rate over 5%, and in the near term, experts say that’ll likely continue to go up. You have the opportunity to get ahead of that increase if you buy now before that impacts your purchasing power.
Mortgage Rates Play a Large Role in Your Home Search
The chart below can help you understand the general relationship between mortgage interest rates and a typical monthly mortgage payment within a range of loan amounts. Let’s say your budget allows for a monthly mortgage payment in the $2,100-$2,200 range. The green in the chart indicates a payment within that range, while the red is a payment that exceeds it (see chart below):
As you can see in the chart, you’re going to exceed your target payment range as mortgage interest rates increase. The result of this often leads you pursue a lower home loan amount, which changes the target purchase price. If you’re ready to buy a home, use this as your motivation to purchase now so you can get ahead of rising rates before you have to make the decision to decrease your target purchasae price and what you borrow in order to stay within your budget.
Work with Trusted Advisors To Know Your Budget and Make a Plan
It’s critical to keep your budget top of mind as you’re searching for a home. Danielle Hale, Chief Economist at realtor.com, puts it best, advising that buyers should:
“Get preapproved with where rates are today, but also consider what would happen if rates were to go up, say another quarter of a point, . . . Know what that would do to your monthly costs and how comfortable you are with that, so that if rates do move higher, you already know how you need to adjust in response.”
No matter what, the best strategy is to work with me as your real estate advisor and a trusted lender to create a plan that takes rising mortgage rates into consideration. Together, we can look at your budget based on where rates are today and come up with a strategy so you’re ready to adjust as rates change.
Bottom Line
Even small increases in mortgage rates can impact your purchasing power. If you’re in the process of buying a home, it’s more important than ever to have a strong plan. Let’s make a plan so you can achieve your dream of homeownership this season.
