How Changing Interest Rates Affect Your Purchasing Power

Interest Rates are at Historic Lows - And Increasing Your Purchase

Interest rates have sat at historic lows for some time now - as recently as a few weeks ago, Freddie Mac's Primary Mortgage Market Survey suggested that interest rates for a 30-year fixed mortgage sat at 3.47%. Rates had remained below 3.5% for more than 16 weeks prior to that. The results of the recent presidential election, however, have led to more turbulent rates than we've seen lately. As of the time of this writing, for example, rates have bounced up to roughly 4.25%

So why do interest rates matter? Not only do mortgage rates influence what a home buyer can expect to spend on monthly housing costs in the future, they also directly impact a buyer’s purchasing power in the short term.

If we define purchasing power as, simply, the amount of home that you can afford to purchase based on the budget that you have available to spend, then we can start to see how mortgage rates and purchasing power are connected. The more you’re able to spend every month on a housing budget down the line, the greater your purchasing power is right now. So it follows that the lower the interest rate, the more home you can afford within your budget. If rates climb and you’re trying to stay within that same budget, the price of the house you can afford decreases.

This chart from Keeping Current Matters does an excellent job of illustrating the connection between interest rates and purchasing power:

Chart on interest rates and purchasing power

Let’s break that down a little bit! This chart assumes a buyer is looking at a home within the national median price range, and wants to maintain a monthly budget for principal and interest payments around $1100 per month.

With rates at 3.25%, that buyer could realistically afford a $250,000 home, as their month-to-month principal and interest payments would amount to $1088, well within their ideal budget. But for each quarter of a percent rise in interest rate, that buyer’s purchasing power falls, and the value of the home they can afford drops by about 2.5%. By the time rates reach 4% - a solid benchmark as we move into the new year – that buyer’s value ceiling has dropped by a whopping 7.5%.

The takeaway, then? Act now! Interest rates aren’t going to sit at these relative lows forever. To get the most bang for your buck, so to speak, it’s important to start your search soon, before the historic lows of a month ago seem more like ancient history.

Ready to get started? We’re here to help! Drop Real Group a line for all of your Chicagoland real estate needs. Take a look at some of our listings and be sure to keep your eyes peeled on Facebook or Twitter for the latest from our team.

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