When you are in the market to buy a new home, the interest rate you get will greatly impact your monthly housing costs or PITI (Principal, Interest, Taxes, and Insurance). A higher interest rate will naturally cause the cost of the interest portion of your monthly payment to go up.
Now in addition to having an impact on your monthly housing costs, your interest rate will also impact your purchasing power. Your purchasing power is the amount of a home you can afford to buy for the budget you have available to spend. As mortgage interest rates rise, the price of a house you can afford to buy will decrease if you want to stay within a certain monthly payment range for your housing.
Currently, the mortgage interest rate for a 30 year fixed rate mortgage is 4.61% according to Freddie Mac's Primary Mortgage Market Survey. In our area, I am still seeing rates around 4.5% lately. Now although these rates are still near record lows they have been slowly rising since the beginning of the year.
I am currently working with several buyers who have had to reevaluate their home search criteria. They are being hit by the double whammy of higher interest rates and higher prices since they started their home search several months ago. They are currently looking at different areas and types of homes so they can still afford a nice home in a good area. So they are surely making different housing decisions from when they first started looking for a home.
To show you the type of impact that rising mortgage interest rates can have on a buyers purchasing power, check out this chart:
The chart depicts a buyers purchasing power if rates rise and a buyer wants to keep their monthly principal and interest payments between $1,850 and $1,900. As you can see with the highlighted payment amount, at 3.75% interest rate, the buyer can have a monthly payment of $1,852 for a house priced at $400,000. Now, if the interest rate goes to 4.75%, the same buyer can only afford a $360,000 home, with a principal and interest payment of $1,878, if they want to stay within their monthly budget between $1,850 to $1,900.
As you can see on the above chart, with each quarter of a percent increase in interest rate, the value of your purchasing power will decrease by about 2.5%. With interest rates predicted to reach about 5% by this time next year, now may be the perfect time to buy a home and get the most house for your money.