How Do Rising Interest Rates Affect Your Purchase Power

Purchasing power refers to the price of the home you can afford based on the budget you have available. Naturally, if interest rates start to increase, you will not be able to afford the same home on the same budget. In a nutshell, you will be paying more for the same home if the interest rates rise.

How do Interest Rates Affect Purchasing Power?

Your mortgage interest rate determines your monthly payment, as well as the total lifetime cost of your mortgage. Until you lock in your interest rate, the current rates being offered may change due to market fluctuations. Locking in your rate when you deem it appropriate will allow you to properly budget for the future costs of your new home!

Just how powerful are interest rates when it comes to purchasing power? In the video here, we break down what happens as rates rise, and the impact it has on your future purchase.  To put it simply, the higher the interest rate, the higher the monthly payment. Meaning the less house you can afford.

Choosing When To Buy

If rates are favorable enough to make the home you want accessible, it's best to pull the trigger and buy. Of course, you need to take a look at your economic stability and future goals, and plans. But, if you're fairly certain you can sustain homeownership getting prequalified for a home is the very first step in making sure your budget is comfortable to begin shopping for a home.

Your Options If Rates Go Up

Buying a home while rates are lower is the best option for home shoppers. But there are other options to help other potential homebuyers qualify for the same price point home at a higher rate, including a larger down payment or adding a non-occupant co-borrower to the loan. A 5- or 7-year adjustable-rate mortgage (ARM) - which comes with lower rates for the first five or seven years - might bring a more expensive home back into reach. Another possible option is an 80/10/10 piggyback mortgage which could allow you to finance part of a larger down payment.

Long Term Rates Forecast

It might be a mistake to assume that mortgage rates' behaviors over the last few years are much of a guide in the long term. Because those have been anomalous by historical standards.

If you spend a little time on Freddie Mac's archive of 30-year, fixed-rate mortgage rates, you can go back to 1971. And, for most of that time, things were very different from how they've been over the last decade.

Since 2010, average rates for these mortgages have remained within a fairly narrow range. Looked at annually, they've not gone higher than 4.69 percent or lower than 3.65 percent.

But rates so low are incredibly rare. In fact, they never once dipped below 6.0 percent before 2003. And there were 11 long years, between 1979 and 1990, when they didn't drop below 10 percent. No mainstream forecasters are predicting a return to those sorts of painful levels anytime soon. But, of course, few would rule out the possibility of rates ever getting back up there.

Bottom line? Don't delay! Buy a home now before rates climb even higher.  Call us today to start the pre-approval process!