The impact of rising mortgage rates on purchasing power

As many prospective homebuyers are painfully aware mortgage rates have taken an acute shift higher since the election back in November.  Mortgage rates have increased by .50%-1.00% depending the loan program and down payment.  Depending on a prospective homebuyers approach this will impact people in different ways.

Lets look at an example of a homebuyer who is committed to a specific monthly payment of $1,600 per month for principal & interest or approximately $2,000 including property taxes and homeowner’s insurance (not an uncommon budget for the Portland-metro area).

The chart below shows the maximum purchase price that buyer would need to look within assuming a 20% down payment.

As you can see throughout the summer of 2016, when mortgage rates were in the 3.50% range, a homebuyer with this budget could look for a home in the ~$445,390 price range and maintain payments within their target budget.

However, as mortgage rates have increased closer to 4.50% today their maximum purchase price has declined by ~$50,000 to ~$394,722.  Effectively, a 1% increase in interest rates for a 30-year fixed rate mortgage reduces a homebuyers purchasing power by ~11%.

We do not know what the future holds for mortgage rates.  As I have written repeatedly as of late in my ‘rate update‘ category I happen to believe interest rates have overreacted to the results of the election.  If I am right then rates will reverse modestly lower and purchasing power will increase.

However, if I am wrong rates may continue to trend higher and homebuyers will need to either be willing to spend more per month or settle for less house.

Are you a prospective homebuyer?  If so, I would love to be a resource for you.  Please contact me for an initial phone conversation.