Purchasing Power

Purchasing Power

Planning to buy a new house? 

Let’s understand the relationship between your purchasing power and rising mortgage rates.

Experts agree that the mortgage rates are steadily heading in the rising direction. So, how do the mortgage rates affect your purchasing power?

The amount of homes you can afford to buy within your financial reach is your purchasing power. 

As rates go upward, the amount of homes you can afford goes down. For every 1.00% increase in interest rates, your purchasing power shrinks by about 10.00%.

For example, let’s say you can afford $1,252 on your monthly principal and interest payment. With a 30-year fixed loan, a 20% down payment, and an interest rate of 4.75% (assumed annual percentage rate [APR] of 4.87%), you could borrow $240,000 to purchase $300,000 home.

But if rates go up to 5.75% (APR 5.88%), the amount of home you can afford decreases to $268,100, causing you to lose $31,900 of purchasing power. That’s a lot of purchasing power!

Also, the monthly disposable amount you can afford for your home remains constant for the moment and with the rates going up, the interesting part of the loan will consume more of your equated monthly installment, which diminishes your residual for principal deduction and thus, the overall loan sanctioned will be lesser or you pay more for your loan. Thus, a higher interest rate also means you’ll spend more money on interest over the life of your loan, causing you to pay more for your home in the long run.

In the rising rate environment that we are in today, it could limit your future purchasing power.

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

So, if you have plans, buy a home now before rates climb even higher. You have the opportunity to get ahead of any further increase, lock your mortgage rates here.

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"Thanks for reading this article and for a hassle-free experience of purchase/sale of home feel free to get in touch".