How Do Interest Rates Affect Your Buying Power? See For Yourself…
What are the factors that qualify a buyer for the purchase of a home? Lenders don’t qualify borrowers based on the Purchase price of a home, they qualify them for a particular mortgage payment. A lender must analyze the new potential mortgage debt (their proposed Principal & Interest, Taxes and Insurances) in relation to the borrower’s income and their other expenses.
It seems that most home buyers look at the process in the same manner… ”What can I actually afford to pay monthly?” and “How will buying this home affect my lifestyle?”. In a rising interest rate environment (which is an inevitability), those questions can have a significant impact on the market.
The chart above lays out and example of what would happen to the monthly payment on a mortgage as the interest rises from 4% on up to 7%. It shows the monthly increase and it also shows how much more the property would ultimately cost over the life of the loan. In this example of using a loan amount of $700,000, we see the 30 year amortized monthly payment rise by almost 40% when the interest rate only rises 3%. In addition to that, the over all cost of the property rises by 23% by the end of the loan term.
Since most buyers are sensitive to the monthly payment, in most cases, the rise in interest rates lowers the buyer’s purchasing power and price. What are the implications and possible outcomes of this mathematical certainty?
- Buyers may wind up with a higher mortgage payment than they are comfortable with and their lifestyles will suffer, or worse, they may no longer qualify for their loan and deals could collapse.
- Buyers will have to “lower their sights” on lesser homes in lesser neighborhoods because their monthly carrying costs are the true determinant to buying a home.
- Buyers may choose to “wait it out”, hoping that rates will come back down (much in the same way sellers held on to the belief that prices would rebound). There is no logic behind that hope, but that won’t stop buyers from getting on the sidelines.
- Sellers will have to reduce home prices the equivalent percentage to attract buyers back so the buyer can get the payment they need to buy.
Please realize these two things:
- For Sellers, you are not likely to get the price you could get today for years to come.
- For Buyers, TODAY may be the lowest interest rate you will be able to get for the REST OF YOUR LIFETIME.
Remember, buyers and lenders want the same thing: an affordable payment. The price of the home is secondary to the monthly cost of the home. Act quickly, if you are looking to buy to get the home you want, in the neighborhood you want, for a payment you want. Price aggressively, if you don’t want to miss out on the opportunity to have as many qualified purchasers to be able to afford to buy your home.