If you are debating purchasing a home right now, you are surely getting a lot of advice. Though your friends and family will have your best interest at heart, they may not be fully aware of your needs and what is currently happening in the real estate market. It’s always best to seek a Strategic Guide over the average agent.
Know Your Buying Power
Whether you are buying now or considering a move in the future, you should always start by knowing your buying power.
Your real estate purchasing power, or buying power, is how much you can spend on monthly housing payments. Interest rates greatly impact your buying power, more so than home prices.
The amount of mortgage funds a homebuyer can borrow is based on:
- the homebuyer’s income, which may change a little bit each year
- current mortgage rates, which change constantly
The long-term cost and monthly payments of a home can be dramatically impacted by mortgage rates. A simple 1% difference in mortgage rates could impact your buying power by about 10% in the mortgage you can afford.
For example, if you can afford a $450,000 loan at 6%, if rates are higher at 7%, your buying power would decrease, which means you can only afford a loan for a little above $400,000. And if rates are lower at 5%, your buying power increases so you can afford a loan for a little above $500,000. See Buying Power Chart below.
What Is The Connection Between Buying Power And Mortgage Rates?
As mortgage rates rise, the interest portion of monthly payments on new mortgages increases, along with the higher monthly loan payment. The result is a reduction in the portion of each payment which goes toward paying off the mortgage principal.
Thus, the maximum price a homebuyer can pay (their purchasing power) declines with rising mortgage rates.
The opposite is true of falling mortgage rates. When mortgage rates decline, buyer purchasing power increases.
Always remember only three things can happen in regards to mortgage rates.