Interest Rates vs Buying Power

This has been a huge topic, as of late, because interest rates are rising and it does affect how much buying power you have. So what does an increase in interest rates mean?

Imagine this, you wake up one morning and decide that you want to buy a home. You start to look on the internet and call a mortgage broker. The mortgage broker gets you qualified for $250,000 at 4%. That is fantastic. You went and hired a Realtor to help. So, you are going to go out the next morning and start looking at houses. You wake up and the sun is shining and it is a very nice 60 degrees. You are all dressed and ready to go. The mortgage broker calls and tells you the interest rates are at 5% now. What does that mean? It means, the the $250,000 home that you wanted to buy will cost you more. For every one percent increase in the interest rate, you lose 10% of your buying power. To keep the same mortgage payment, the $250,000 purchase price becomes a $225,000 purchase price.

Lets look at an example to show the difference:

Lets use the $250,000 purchase price in the story above.

4% Interest Rate
Purchase price - $250,000
Interest rate - 4.0%
Monthly Mortgage Payment (Principal + Interest) - $1,194

5% Interest Rate
Purchase price - $250,000
Interest Rate – 5.0%
Monthly Mortage payment (Principal + Interest) - $1,342

Difference
Payment Increase of $148

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That does not seem too bad, but that $148 is actually costing you $17,760 over a 10 years or $52,280 over 30 years. To use it in the real world, $148 is about four to five tanks of gas a month. That adds up.

To keep the same $1194 payment at a five percent interest rate you will need to buy a home around the $225,000 price point. Knowing Atlanta and how the housing market has become so price driven, the decrease in buying power could affect the size, upgrades, schools, and the area you want to live in.

Current Interest Rates

The interest rates have gone up over a half a point since September 2017. That is already a 5% drop in buying power. It also does not factor in appreciation of home. If that $250,000 home becomes $255,000 then you have lost 5,000 more.

Take a look at the six month chart for interest rates. You can see an upward trend. This trend will continue. Different projections, that I have read, say that interest rates could be above 5% by the end of this year.

US 30 Year Mortgage Rate data by YCharts

I know the inventory is low, but the longer you wait the more it will cost you. If you need to sell, take advantage of more buyers in the market, low inventory, higher sales prices, and better terms. Use that extra money for another house. Interest rates at five percent are still low. When I bought my house is 2006, I had an interest rate at seven percent. All I am saying, is that if you have a certain mortgage payment that you want to stay around, the longer you wait the less buying power you will have, the type of home you want and the features and location could change.