What effect do higher interest rates have on a buyers purchasing power?

Mortgage and Lending with Guaranteed Rate, Inc

Yesterday I was asked how much an increase in interest rates would effect a borrowers purchasing power. 

I provided the following example and wanted to share... 

Assuming current rates are around 4.875% (4.99% APR) and rates increased to 5.5% (5.69% APR) it could affect the buyers purchasing power by as much as $20,000!  Here is an example... 

Let's take a $300,000 mortgage at 4.875% for 30 years.  The mortgage payment (principle and interest only) would be $1,587.62.  

In order to have this same mortgage payment at a 5.5% interest rate the mortgage amount would need to be $279,614. 

You can see there is more than a $20,000 difference in purchasing power with a small increase in interest rates. 

If you have sellers/buyers who don't want to reduce their sales price or are on the fence about buying, showing them how much buying power they will lose if rates do go up a little might help them make their decision.

Visit me at www.mikebadessasmc.com




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Comments (1)

Joetta Fort
The DiGiorgio Group - Arvada, CO
Independent Broker, Homes Denver to Boulder

This is a very important post, helpful for informing the public. Thank you for posting your answer!

Jan 24, 2011 06:29 AM