But, what does that REALLY mean and how does that affect your home purchase power?
So, let’s say that you qualify for a Principal & Interest (P&I) monthly payment of $1,200 (using only P & I to illustrate – taxes, homeowner’s insurance and mortgage insurance are not included).
- Sales Price of $295,000
- $1,200 per month
- 30-year fixed rate
- 20 percent down payment
- Loan amount of $236,000
- 4.5% interest rate
So, what happens with a 1% increase in interest rate?
Same scenario — but the rate is now 5.5%. The maximum sales price decreases to $265,000. With 20% down payment, the loan amount is now $216,000 or a 10% decrease in purchasing power.
This chart shows you how a .5% or one-half percent interest rate increase affects a home buyer’s purchasing power.
(NOTE: Monthly payments have been rounded up or down by a few dollars. APR’s are not disclosed. Chart for illustration purposes only.)
Here’s the bottom line! For every .5% (one-half) percent increase in interest rate your purchasing power may be decreased by 4 to 5 percent (the percentage is smaller for lower loan amounts).
For every 1 percent interest rate increase, your purchasing power may be decreased by 9 to 11 percent (the percentage is smaller for lower loan amounts).
While no one can tell you exactly when and by how much there will be an increase in interest rate, the chart above gives you an idea of how it may affect how much you will qualify for when buying a home.
Information provided by Brandon Roy, Fairway Independent Mortgage Corporation