How will higher interest rates affect your buying power?
Many times buyers resist this crazy market with multiple offers and rising prices. Although this is unsettling for many, the real concern should be rising interest rates. For example, if you were a buyer in the market Spring of 2016 and were considering buying a home at $400,000, but timing did not work out for some reason, that same home this Spring could be worth approximately $436,000 or approximately a 9% appreciation. Granted this is a hefty change, however not as much as if the interest rate increases 1%. Let me illustrate.
If the interest rate last year was 4.0% and you fell in love with a home listed for $450,000, for giggles, imagine that the market had 0% appreciation in the past 12 months, but the interest rate this Spring is 5.0%. Given that your down payment remained the same 10% down and all other taxes, insurance and other variables in the payment remained the same, your payment would change by $214 for the same priced home this year. How does that affect your buying power? Well to attain the same payment as last year, you would now be purchasing a $400,000 home. A $50,000 swing in buying power is the effect of a 1% rate increase at $400,000.
In addition, the higher your price range, the higher the difference in buying power. For an FHA buyer, 3 ½% down at $225,000, their buying power would be reduced approximately $25,000 for a 1% rate increase and a larger home at $675,000, would be reduce to the $600,000 price range for the same monthly payment. As the indicators hit the market and the stock market and job employment rates are favorable, we may see rates climb this year. We have already seen an uptick since the beginning of the year.
These are general figures, but the overall message is to consider all terms of the market that affect your payment and value when purchasing a home. In our industry, we often see people attempting to wait out the market until the “market settles down” or “prices stabilize”. While it is always wise to not get caught up in the frenzy of the market, if you are truly looking for a home, please consider that waiting for the prices to relax may do to your buying power and overall mortgage payment. Possibly paying a little higher price on that home with a lower interest rate is not such a bad idea after all!