You’ve seen the advertisements, news reports, posts on social media and maybe you have even said these words, “The feds are planning to increase rates, so you better buy a home now.”
But, what does that REALLY mean and how does that affect your home purchase power?
Let’s say you started the home search process when interest rates were 7%. You saw a one-bedroom condo for sale for $100,000. You calculated your 30-year monthly mortgage payment on $80,000 – the amount you are mortgaging after a 20% down payment and your closing costs. Your monthly payment would be $532. You decide you don’t like this payment and rate, so you wait six months and the interest rate drops to 5%. However, a condo in the neighborhood you want now averages $120,000. You put down 20% plus closing costs and you are left with a mortgage amount of $96,000. Your monthly payment on a 30-year mortgage is $515. Your payment dropped by $17.
But does a payment drop financially make up for the higher down payment? Factoring in that your down payment was $4,000 more, you still save about $5 to $6 per month – around $2,100 of savings over the course of 30 years. (1)
For every 1 percent interest rate increase, your purchasing power may be decreased by 9 to 11 percent (the percentage is smaller for lower loan amounts).