The Relationship Between Interest Rates and Affordability

Real Estate Agent with Windermere Real Estate N.E.

By Greg Perry
Kirkland Realtor

Workingforyou_sign Mortgage interest rates are hovering at about their lowest levels for the year. There are many forces at work in our current economy. Weak dollar, high oil, inflation? recession?, liquidity crises. Yet for right now mortgage interest rates are hovering right at 6%.

Did you know the how mortgage interest rates affect affordability in a house purchase?

Basically the Affordability index goes like this:
Every 1% increase in mortgage interest rates equals a 10% decrease in purchasing power.

Here's how that math plays out for a 30 year amortized loan (Per 1,000 borrowed):

A 6% Rate equals a monthly principal and interest factor of $6.00.

A 6.25% rate = a factor of $6.16
A 6.50% rate = a factor of $6.33
A 6.75% rate = a factor of $6.49
A 7.0% rate = a factor of $6.65
A 7.25% rate = a factor of $6.82
A 7.50% rate = a factor of $6.99
A 7.75% rate = a factor of $7.16
An 8.0% rate = a factor of $7.34

If you have a $300,000 loan @ 6% --- $300,000 x $6.00 = $1800.00 P/I Payment
Now if rates go up 1%, you will experience a 10% drop in affordability.

A $270,000 loan @ 7% ----- $270,000 x $6.65 = $1,795 P/I Payment
If rates would rise to 8%, here's what it looks like:
A $254,000 loan @ 8% ---- $254,000 x 7.34 = $1,864 P/I Payment

Will mortgage rates rise, fall or remain steady in 2008? Who has the clearest crystal ball?


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Matt Ratcliffe, REALTOR
Keller Williams Realty Brazos Valley - College Station, TX
You put it the simplest terms thank you.  It does make sense.  Know that as taxes and insurance rise so does the expense.
Jan 05, 2008 06:52 AM #1
Russ Ravary ~ Metro Detroit Realtor call (248) 310-6239
Real Estate One - Commerce, MI
Michigan homes for sale ~
That is a easy way to fiqure it.
Jan 05, 2008 07:10 AM #2
Frances C. Rokicki
Fran Rokicki Realty, LLC - Bolton, CT
Remember, it is also, an election year!  The politicians want our vote, let them know Realtors count.  I believe they will try to keep the economy strong, therefore, low interest rates.
Jan 05, 2008 08:36 AM #3
Michael Eisenberg
eXp Realty - Bellingham, WA
Bellingham Real Estate Guy
Thanks for the simple explanation, I will be learning to use it
Jan 05, 2008 09:49 AM #4

Thanks all,

Buyers have a window!  We need to be able to articulate the benfits of low interest rates.

Jan 09, 2008 10:14 AM #5
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