The Federal Reserve announced it would raise short-term interest rates a quarter-percentage point and signaled it could lift them at a slightly more aggressive pace in coming years. Mortgage Rates immediately increased after this announcement. Additional fed rate increases throughout the year could push mortgage interest rates as high as 5% by year’s end.
How do rising mortgage rates affect your purchase power?
Buyers need to know what it really means when mortgage rates are rising. Purchase Power is the price of a home you can afford and is directly impacted by current mortgage rate when your purchase. Here is an example to explain…
If you qualify for a maximum monthly payment of $1,200 and interest rates are at 4.5%, then you would have the Purchase Power to buy a home up to $240,000.
Sales Price of $240,000
4.5% interest rate
$1,196 per month
30-year fixed rate
20 percent down payment
Loan amount of $192,000
What happens with a 1% increase in interest rate?
Same scenario but the interest rate is now 5.5%, then you would have the Purchase Power to buy a home up to $217,500.
Sales Price of $217,500
5.5% interest rate
$1,196 per month
30-year fixed rate
20 percent down payment
Loan amount of $174,000
After mortgage rates rise 1%, your purchasing power is reduced by 9.4%. This means you would lose $22,500 in purchasing power and have to find a home that costs $22,500 less than if you had purchased when rates were 1% lower.
Here is a graphic illustrating the price of home you can afford as mortgage rates change.
Bottom Line: For every 0.5% increase in interest rate your purchasing power may be decreased by 4 to 5 percent. For every 1.0% interest rate increase, your purchasing power may be decreased by 9 to 11 percent. Note: the percentage is smaller for lower loan amounts and higher for larger loan amounts.
