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How Higher Interest Rates Affect Your Buying Power

August 29, 2017

 

While mortgage interest rates remain at historic lows, they've been creeping up recently, with bigger gains expected for the coming year. So what does that mean if you're planning to buy a home?

Higher rates can affect your ability to buy a home. If you are considering buying, we recommend you do so now while rates are still affordable. 

Higher Rates = Less Buying Power 

As rates go up, the amount of home you can afford goes down. For every 1.00% increase in interest rates, your buying power decreases by about 10.00%. 

For example, let’s say you can afford $1,194 on your monthly principal and interest payment. With a 30-year fixed loan, a 20.00% down payment, and an interest rate of 4.00% (assumed annual percentage rate [APR] of 4.053%*), you could borrow $250,000 to purchase a home around $312,500. 

But if rates go up to 5.00% (APR 5.056%*), the amount of home you can afford decreases to $278,025, causing you to lose $34,475 of buying power. That’s a lot of buying power! 

Here it is broken down: 

Think of what that buying power could translate to — a better neighborhood or school district, a starter home that requires little to no renovation, a larger space for your growing family? An increase in rates could cause you to lose out on those opportunities. 
 

Higher Rates = More Money Spent On Interest 
 
A higher interest rate also means you're likely to spend more money on interest, causing you to pay more for your home in the long run. 
 
Bottom Line? Don't delay! Buy a home now while rates are still affordable. 
 
We are not financial advisors. You should consult a financial advisor to devise a financial strategy that works best for your situation. 
*For example only. Program rates, terms and conditions are subject to change at any time and may vary based on borrower’s credit history.

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