How an Increase in Mortgage Rates Impacts Your Buying Power

With current mortgage rates hovering around 3.5% for a 30-year fixed loan, and overall rates being at historic lows, it’s easy to think they may always remain this way.  However, mortgage rates are determined by the same cyclical nature of other factors in the economy, and looking back over the last 200 years it becomes apparent:

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Although we are not likely to see the 16% mortgage rates of the 1980’s, the consensus among economists is that we are beginning to see a slow and steady climb toward higher mortgage rates.  Realistically, rates may be around 5% by the end of 2014.

From an historic perspective, 5% is still on par with rates not seen since the 1960’s, but what does that mean for your buying power when purchasing a home?

Suppose that today you found your dream home, priced at $215,000, and you qualified for a 30-year fixed loan from your lender at 3.5% interest with 5% down payment, resulting and a principal and interest payment of $917.

If the interest rate rose 1% to 4.5%, the sales price would have to be $190,000 in order to have the same payment.  What features might you have to give up in your dream home if you had $25,000 less to spend?

Now assume rates rose just .4% more to 4.9%, which is the prediction for the end of 2014 from the Mortgage Bankers Association.  This would reduce your budget to $180,600 to keep the same $917 mortgage payment.  Just a 1.4% increase results in nearly $35,000 less buying power – a substantial amount that could limit your purchase options.

If you are in the market for a home, start by meeting with a lender to get pre-approved for a loan so that when you find your dream home you can act quickly and secure the best possible rates.

For more information on finding a home or a lender in the San Antonio-Boerne area, visit KendallBexarHomes.com.