How rising interest rates can impact affordability
Chances are, you’ve probably heard a friend, neighbor or relative say they’re “waiting to buy. Well, have you noticed that both home prices and mortgage interest rates are rising? This can affect how much home a Buyer can afford when they go to get prequalified at their Lender's office.
Prices of homes are increasing and the supply of available homes has remained low. Supply and demand causes prices to rise when fewer homes are available. However, mortgage rates are still at near historical lows, but that may not last much longer.
The truth? Interests rates can have a much more significant effect on price. In other words, locking in low interests rates will almost always allow a buyer to purchase a higher priced home than when the mortgage rates go up. Here’s the other caveat: the longer you wait for a home's’ price to drop, the more likely it is that interest rates will go up.
Let’s look at an example where an increase in interest rates are applied to a 30-year loan. As you’ll see in the table below, the effect of an increasing interest rate is huge - much bigger than a 10 percent drop in home price. Conversely, a drop in interest rate can significantly decrease the total interest paid over the life of a mortgage loan.
Example
Home Purchase |
Rates Up 1% and
Prices Steady |
Rates Steady and
Prices Drop 10% |
Rates Up 1% and
Prices Drop 10% |
Home Price |
Home Price |
Home Price |
Home Price |
$250,000 |
$250,000 |
$225,000 |
$225,000 |
Interest Rate |
Interest Rate |
Interest Rate |
Interest Rate |
4.23% |
5.23% |
4.23% |
5.23% |
Principal & Interest |
Principal & Interest |
Principal & Interest |
Principal & Interest |
$981.54 |
$1,101.93 |
$883.39 |
$991.74 |
Total Interest Paid |
Total Interest Paid |
Total Interest Paid |
Total Interest Paid |
$191,693 |
$245,869 |
$172,523 |
$221,282 |
The first scenario in the second column is historically more likely to happen than the latter two. And as we’ve witnessed over the past five years, mortgage rates had fallen to historical lows, making homes even more affordable for buyers.
It’s important that potential home buyers understand the positive financial impact low interest rates have on the cost of home ownership. For those who can afford to buy, trade up, or invest, our current market can save you thousands of dollars over the life of a typical mortgage loan and offer a lifetime of opportunity.
Are you ready to buy now in Arizona? Well, you have come to the right place. Contact me, Jeff Masich and I will set you up with a Free MLS home search and help you buy the right home at the right price!
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