How Interest Rates Affect Buying Power

We go over how rising interest rates affect your buying power.

Today we’re talking about something we’re keeping a close eye on: interest rates. They have increased recently, and it’s likely they’ll increase more this year. We want to go over how interest rates work and what they mean for buyers in today’s market. 

"Rates have a bigger impact on your buying power than home prices."

The main thing interest rates affect is your buying power. Let’s look at an example. If you want to buy a $400,000 home, and interest rates are 3.5%, then your monthly payment (excluding taxes and insurance) will be about $1,796. If rates increase to just 4.5%, your monthly payment will increase to $2,027. That’s an extra $231 every month. 

Now let’s say you’re in a multiple-offer situation on this home, and you need to increase your offer price to stay competitive. This is a common situation in today’s crazy market. If you offer $420,000 for this home with 3.5% rates, your monthly payment will be $1,886. If rates increase to 4.5%, it will increase to $2,128. As you can see, rates have an even bigger impact on your buying power than home prices.

What can we take away from these numbers? If you are looking to buy in 2022, we recommend you do so sooner rather than later. Even if you have to pay a little extra to have your offer accepted, your monthly payment will still be lower now than when rates rise. 

Mortgage calculations can be a complicated process. If you have any questions, please give us a call or send us an email. We’d love to help!