How Interest Rates Affect Purchasing Power


money

It’s no secret that interest rates impact a home buyer’s purchasing power. But how great an effect, exactly, do interest rates have?

Take this example. Let’s say that you qualify for a Principal & Interest (P&I) monthly payment of $1,200—not including taxes, homeowner’s insurance, and mortgage insurance. The purchase details are:

  • $295,000 sales price
  • $1,200 per month
  • 30-year fixed rate
  • 20% down payment
  • $236,000 loan amount
  • 4.5% interest rate

What happens if you increase the interest rate by 1% to 5.5%?

The maximum sales price decreases to $265,000. With a 20% down payment, the loan amount is now $216,000. This constitutes a 10% decrease in purchasing power.

Curious about how a .5% interest rate would affect your purchasing power? See the chart below for monthly payments (rounded up/down for clean numbers and without APR’s).

The bottom line? Every .5% (one-half) increase in interest rate decreases a home buyer’s purchasing power by 4-5% (the larger the loan, the larger the decrease).

And every 1% interest rate increase decreases purchasing power by as much as 9 to 11%.

Keep this interest rate-purchasing power relationship in mind as you shop for mortgages, monitor the lending market, and strive to increase your credit score. If you understand how interest rates affect purchasing power, you’ll be rewarded with a higher purchasing power.

Guest Blogger Amy Cairn, Senior Loan Officer / Sales Manager at Guild Mortgage Company