What does a 1% change in Mortgage Rates do to your Purchasing Power?

By
Mortgage and Lending with iBERIABANK Mortgage

When a buyer gets pre-approved one question I always ask is how much of a payment can they afford?  Not how much we will approve you for, as that may be a different number. 

The affordability of a payment is made up between the loan amount, interest rate, down payment, taxes, and insurance.  In the current market we have rates that are running along the all time low levels.  Along with these all time low rates we have depressed housing prices, which are the lowest most of us have seen in our career.  Couple these two and you have an AMAZING deal!  However there are some buyers that want rates to be lower and housing prices to be lower.  Will that happen???  Only time will tell.  There is a better chance of these rates and prices bouncing off the bottom levels then there is with them going even lower. 

So, what would happen if rates increased a full 1%?  A good rule of thumb is for every 1% increase in rates, in order to keep your payments the same a buyer would have to lower the loan amount by 10%.   For a person buying a home with a loan amount of $200,000 with a rate of 4%.  If rates went up to 5% then the loan amount would need to decrease by 10%, which would be $180,000 loan to keep the same payment. That is a HUGE purchasing power difference in a house!

Now keep in mind that once the government announced that we were in a recession we had already been in it for 1 year.  A bottom in the market is never realized until it is no longer attainable. 

Next time you have a buyer wanting to wait a little longer because they do not think the bottom is here.  Run these numbers by them and see what they say.  Rates are not going to stay here forever and nor are housing prices.

 

Posted by

iBERIABANK Mortgage

Conrad C. Eberhard
Mortgage Loan Officer

(479) 695-3709 Office
(479) 387-4647 Cell
(479) 444-9959 Fax
2566 E. Joyce Boulevard
Suite 1
Fayetteville, AR 72703
 

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Comments (2)

Nancy Corsaut
Zephyr Real Estate - San Francisco, CA
San Francisco Realtor, CRS, GREEN

Conrad, this is a great reminder.  I had a client who just bailed from the property search because he believes prices will go lower.  I try to explain to my clients, EXACTLY what you pointed out...by the time we know the market has hit bottom, it will be moving up again and they will have missed it.  Purchasing a home shouldn't be viewed like gambling or playing the stock market.  It is a long term investment and should be viewed as such.  When clients tell me they want to time the market, so they buy low and sell high, I feel a little inwardly deflated.  Thanks for the post.

Oct 03, 2010 11:11 AM
Yvette Chisholm
Long & Foster Real Estate, Inc. - Rockville, MD
Associate Broker - Rockville, MD 301-758-9500

It is a huge difference!  A well written post too.   Good luck with your blog and please stop by my blog again!

Oct 05, 2010 04:29 PM