Interest rates have begun moving upward, a new concern to buyers currently searching for a home. Understanding how increasing interest rates impact the price of the home will help to determine the time to buy and how much house buyers can afford.

How Interest Rates Impact Affordability

Lower interest rates reduce the overall amount paid for a home and the monthly financial obligations. Since payments directly tie to the loan amount and therefore, the amount a buyer can be approved for, any change in interest will inevitably make a substantial difference in what type of home is affordable and potentially affect a buyer’s ability to find the house of their dreams.

For example, consider a $300,000 house mortgaged with a 4% interest rate and a loan term of 30 years. Presuming a 20% down payment ($60,000) and a loan amount of $240,000, monthly principal and interest payments would be $1,146.00. If that interest rate increased by even one percent to 5%, monthly payments would correspondingly rise to $1,288.00. This payment, based upon the higher interest rate, is nearly equal to the payments a buyer would be making if they had paid $330,000 for the same home mortgaged at 4% -- or a whopping ten percent increase in the price.

While a buyer may be comfortable affording the extra $142 per month, their lender will need to approve the loan for the higher amount as well. Depending upon a buyer’s debt-to-income ratio, this may be feasible or not.  So if you are looking at the top of your budget range, even a $100 increase in your payments could mean the difference between approval and rejection. Assess your basic payment information with online mortgage calculators.

How to Deal with Rising Interest Rates

For those actively in the market to buy a home soon, now is the time to act before rates rise further. Lower interest rates and home prices make purchasing a property more affordable.

One way to increase affordability and purchase a home priced near the top of your budget (or just over) is to pay points on your loan. Points are determined based upon the amount of your loan with each point equaling 1% of your mortgage balance. Points are treated as prepaid interest on your loan and thereby can reduce the rate offered, the associated payments required and thus, the affordability to the borrower.

In summary, when shopping for a home and selecting the right financing, pay attention to both the interest rate and the price of the property. This will help to ensure that you choose a property that fits your needs and financial capability. For additional information on the buying process or recommendations to trusted lender professionals who can assist you in determining how much you can borrow, please contact me today for a consultation. I will be happy to answer any questions you may have, and/or help you find your dream home.

Allyson Hoffman, ABR, ACRE, CDPE, CRS, e-PRO, GRI, SFR, SRES
RE/MAX Villager
Serving Chicago's North Shore, North and Northwest Suburbs
[email protected]

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Allyson Hoffman is your ultimate real estate resource for Chicago's North Shore, North and Northwest Suburbs and surrounding areas. Visit my website for detailed information regarding today’s real estate markets. 

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