Interest rates have been at historic lows for some time, but they’re on the move. The U.S. Federal Reserve, which raises and lowers interest rates to stimulate or control the economy, has raised rates twice since December 2016. And they plan to hike rates two more times this year.
But do these rate hikes directly impact you? If you’re planning to buy a home, they do.
Higher Rates = Less Buying Power
As rates go up, the amount of home you can afford goes down. For every 1.00% increase in interest rates, your buying power decreases by about 10.00%.
For example, let’s say you can afford $1,194 on your monthly principal and interest payment. With a 30-year fixed loan, a 20.00% down payment, and an interest rate of 4.00% (assumed annual percentage rate [APR] of 4.053%*), you could borrow $250,000 to purchase a home around $312,500.
But if rates go up to 5.00% (APR 5.056%*), the amount of home you can afford decreases to $278,025, causing you to lose $34,475 of buying power. That’s a lot of buying power!
Here it is broken down:
Think of what that buying power could translate to for you: a better neighborhood or school district, a starter home that requires little to no renovation, a larger space for your growing family? An increase in rates could cause you to lose out on those opportunities or make it more expensive for you to attain them.
Buying Now Could Save You Money
Whether you’re looking to buy your first home, upsize or downsize, or purchase an investment property, waiting until later in the year could cost you more. By buying now, you can take advantage of stronger buying power and get more for your money.
*For example only. Program rates, terms and conditions are subject to change at any time and may vary based on borrower’s credit history.