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How Interest Rates Affect Purchasing Power

We’re sure it comes as no surprise to most of you, but did you know that interest rates have a direct affect on what one can afford? A colleague of ours put together some numbers to show just how much purchasing power is lost with interest rate increases. Here is the math*: Interest rate – 5.25% Desired monthly mortgage payment – $4,418 How much home can you afford? $1,000,000 Let’s say rates go up 1%. How does that change the scenario? Interest rate – 6.25% Desired monthly mortgage payment – $4,418 How much home can you afford? $896,922 Let’s say rates go up 2%. What can you shop for now? Interest rate – 7.25% Desired monthly mortgage payment – $4,418 How much home can you afford? $809,541 You can see that if rates go up just one percent, your purchasing power decreases by $103,078. And if rates go up two percent, your purchasing power goes down $190,459! Two hundred grand is a lot of house. Many economists and industry professionals are  predicting an upward trend in interest rates. Those waiting for the market to bottom out could negate any savings by paying higher rates in the future. Just something to think about if you’re currently playing the sidelines and are planning to own long term. Another thing to consider if you’re playing the sidelines is this: When the first signs of a recovery become known, you won’t be alone in getting into the market. Right now buyers have top pick at the properties they want. But when everyone comes rushing back  in, buyers will be back to settling on their 2nd and 3rd choices. Are we saying now is the time to buy? Not necessarily. It all comes down to your individual situation. But as this article mentions, buyers with a little cash saved up who are planning on holding their property long term have it pretty good right now. *Based on down payment of 20% on a 5/1 P&I jumbo ARM with one point.