When interest rates rise, it lessens the buying power of potential buyers because it increases monthly payments which are used to decide how much money the lender will let the buyer borrow.
Following is an example to illustrate how your buying power is reduced or how your monthly payments are affected as rates change: At a 6% fixed rate, with 30 years of payments, one would have to pay approximately $600.00/month for every $100,000 borrowed. At a 7% rate, one would have to pay about $665.00/month on every $100,000 borrowed. So, in this example, for a $350,000 home your monthly payment would increase by $227.50)/month (from $2100/month to $2327.50) if the interest rate rose 1%.
Home Price Interest Rate Monthly Payment
$300,000.00 6% $2,100.00
$300,000.00 7% $2327.50
Let’s do a second example. At a 6% fixed rate, with 30 years of payments, your monthly payments for a $500,000 would be $3000/month and at a rate of 7% would be $3325 (a $325/month increase in payments).
Home Price Interest Rate Monthly Payments
$500,000.00 6% $3,000.00
$500,000.00 7% $3,325.00
Obviously, an increase in rates can have several negative affects on the market. With less buying power, buyers may find that they can no longer afford now what they could have afforded a couple of months ago. This can decrease the number of financially qualified buyers. Less buyers in the market equals less demand for homes, causing a downward pressure on prices in some of our local Seattle communities. You may wonder than if you should wait until prices drop before you buy – the answer is no (see example below).
Let’s look at it from a slightly different perspective why waiting for prices to drop is the wrong approach. Example: You decide to wait to buy your home until prices drop 10% percent. The risk in waiting could be higher interest rates and higher mortgage payments as seen in the example above. So if the price of a home happens to drop ten percent from $500,000 to $450,000, but interest rates rise 1% point from 6% to 7%, your payments are still about $3000 a month. Only a $7.50 change in monthly payments.
Home Price Interest Rate Monthly Payments
$500,000.00 6% $3,000.00
$450,000.00 7% $2,992.50 (-$7.50)
One more tidbit of caution. When rates rise, they usually rise fast (much faster than the change of appreciation).
Disclaimer: The above rates I used are not actual rates here in Seattle — they’re just used as an example to show the effect of rate changes on monthly payments. Rates do vary depending on your credit score, how much you are borrowing, and market conditions. Please consult a mortgage professional to get a better idea of what your monthly payments would be and to see what you can afford. We would be happy to refer you to our team lender for further information.
If you have more questions, about this topic, please feel free to contact us at 206.276.5827 or at kerstinbrooks@earthlink.net.
For the folks who prefer this information in a visual/audio format, please watch a brief video summary about this on YouTube.
Kerstin G. Brooks, ABR, Realtor
Brooks & Heinze Team at RE/MAX NW Realtors
http://www.propertyinseattle.com/
Phone: 206.276.5827
Email: kerstinbrooks@earthlink.net
Kerstin G. Brooks, Broker 