Interest Rates and Affordability

As a Realtor®, we always hear people talk about what "price range" they are looking in. Obviously sellers will care what they will receive for selling dollar-wise, but our buyers should be more concerned with a monthly payment, which is a function of down payment, term (in years), and interest rate. From a buyer's perspective, until they have talked to a lender, the price range is ultimately irrelevant.

During the pre-qualification or pre-approval process with a lender, it is important for a potential buyer to be honest about what they have to put down, their current economic situation, and what they are comfortable with paying on a monthly basis for the next 15 to 30 years. Just because a buyer is pre-approved for $450,000 does not mean that they accompanying mortgage, taxes, and insurance are a figure they are comfortable with committing on a monthly basis.

Mortgage Rates and Fed Interest Rates

While mortgage rates are not directly tied to the federal reserve interest rates, they do tend to move somewhat close to tandem. Interest rates on mortgages are currently still at historically low levels and it is a great time to lock in a mortgage at one of these low rates.

Mortgage Rates and Home Prices

Some speculate that an increase in mortgage rates will decrease home prices since it will decrease the amount of home some buyers can afford. According to CNBC, increase in interest rates may not decrease prices, but increase due to the other economic indicators that are tied to an increased rate, such as widespread perception of the economy.

Mortgage Rates and Affordability

So back to the initial discussion of monthly payment, as a function of down payment, terms, and interest rate. If we look at the typical 30 year mortgage, with 20% down. If we keep the monthly payment the same and adjust the rate from 4% to 5% APR, how much is our purchasing power decreased?

The answer may be surprising, it was to me.

It is actually OVER 11%!!!

This just means today is a great time to buy. Whether you are a first time buyer, moving up, or moving down, doing so now and locking in a great rate is a very smart move. If you have any questions on the buying or selling process, please do not hesitate to reach out to me. I am always here to help.