How do changing interest rates affect your home buying power in this changing market?
My first home purchase was in 1998 and I had an interest rate around 8%, from what I remember! It didn’t deter me a bit… and over the years, I had rates as low as 4%.
In 2020, before everything went nuts, my daughter sold her home and bought a new construction home, and locked in about 2.75% for their loan. Jealous. That’s what I was. Just Jealous!
2022 and Beyond
2022 had Home Buyers running around trying to lock in rates before the announced increases hit their pocketbook. They saw rates go from all-time lows to 3% then 4% and then rise above 5%. I’m seeing many home buyers (especially in new construction), lose the home they wanted because they were at the HIGH end of their financing capability. One increase can knock them out of their financing when you’re “living on the edge”.
Perspective is Important
My parents had rates around 18%, so why cry at 5% for a home loan?
Well, when buyers see others getting lower rates in the prior year, they have a little FOMO (Fear of Missing Out). But just think of this, PAYING RENT is like having a 100% Interest on a loan. None of that money goes back to you?
How can I calculate the Impact?
There is a great rule called the “1/10 Rule” that helps calculate your buying power when the interest rates change.
The concept is simple and easy to explain: When interest rates increase by 1%, buying power goes down 10%. The reverse is also true. When interest rates decrease by 1%, buying power goes up 10%.
Say, for instance, a buyer qualifies for a $300,000 mortgage, but the rate suddenly hikes up 1%. The buyer’s purchasing power drops to $275,000:
$300,000 – $30,000 (10%) = $275,000
What can I do?
When looking for a home, there are many options to find a home that is affordable to you. A Realtor® can help you navigate this process and help you find the right home that is within your budget.
Did you know that some new construction builders will BUY DOWN the interest rates to help you qualify for MORE home? I do! Call me to find out more!
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