How Mortgage Rates Impact Your Buying Power

Well, this is it y’all…30 year fixed rate mortgages have gone up by almost HALF a percent in just the past month. Now that may not seem like a lot, but that additional half a percent raises your monthly mortgage payment a lot more than you think. With mortgage rates predicted to go up, even more, this year, it’s important to understand how exactly they impact your buying power.

Now you may have absolutely no idea what a mortgage is, and if that’s the case, then the simple explanation of what a mortgage is that it’s a type of loan that home buyers use to finance a property, now that’s not too complicated, right? Well, there’s more to it than that.

A mortgage is made up of four components that you pay for every month, and those are principle, interest, taxes, and insurance. I recently made a video explaining all of these components, so if you want to learn more about them you can click here to watch it.

For the sake of your short attention span, we’ll only be focussing on two of those components, which are principle and interest. Principal is the money that you borrow from the lender to purchase the property, and interest is what the lender charges you for borrowing that money. Every month when you make your mortgage payment, part of it will go towards paying the principal, and part of it will go towards paying the interest.

The last term you’ll need to understand is amortization, which is the process of paying off a mortgage in fixed monthly payments over a certain period of time, which for example, could be 10, 20, or 30 years. During the beginning of a mortgage, most of the payment will go towards interest. As each payment is made, less goes towards interest, and more goes towards the principal. Towards the end of your mortgage, most of the payment will go towards the principal.

So why is this all so important to know? Well, the principal and interest make up the majority of your mortgage payments, so as mortgage rates go up, the price that you can afford to buy a home goes down.

To give you a better idea of what I’m talking about, I’ll be going over a scenario. For this scenario, let’s say that you’re purchasing a $250,000 home. You decided to make a 3.5% down payment and take out a 30-year fixed-rate loan to pay for the remainder of the purchase price. And to keep things simple, we’ll just say that property taxes are $200 a month and homeowner’s insurance is $100 a month. Now to take out this mortgage, as I’ve mentioned earlier, you’re going to have to pay interest on the money that you’ve borrowed, so let’s say you were able to secure a 3.0% mortgage rate for your loan. We now have enough information to figure out what your mortgage payment would be for this property, so when you plug all of this information into a mortgage calculator, your mortgage payment ends up being $1,317 a month. Not too shabby, huh? Especially for a $250,000 home!

But wait, let’s say that the mortgage rate on your loan is 4.0% instead. If you still want to keep your mortgage payment at $1,317, then instead of buying a home for $250,000 home, you would have to buy a home for $220,750…that’s a price gap of almost $30,000!!! Just think about all of the things that price gap could translate to such as a home with more upgrades or a better school district.

One other thing to keep in mind is that the higher your mortgage rate is, the more you’ll be paying in interest over the life of your loan. If we go back to the scenario that we just went over, the total amount of interest you would pay for the loan that has a 3.0% mortgage rate is $129,443.63 and the total amount of interest you would pay for the loan that has a 4.0% mortgage rate is $158,651.94…that’s an additional $29,208.31 that you would be paying in interest over the span of 30 years!

The main thing that I want you all to take away from reading this blog is that if you’re ready to buy a home now, then what are you waiting for? Mortgage rates are expected to keep going up this year, so if you don’t want your buying power to go down, then start actively searching for homes right away! If you have any questions about the home buying process my preferred lenders and I are here to answer them for you. I hope that this blog conveyed to you just how much of an impact mortgage rates have on your buying power and I’m wishing for you all to move into your dream home in the near future!

Citations

“Amortization Schedule Calculator.” Bankrate, www.bankrate.com/calculators/mortgages/amortization-calculator.aspx.

“Don't Let Your Buying Power Slip Away.” Nortwest Bank, www.nw.bank/newsroom/realtor-news/how-higher-interest-rates-affect-your-buying-power#:~:text=Higher%20Rates%20%3D%20Less%20Purchasing%20Power,power%20decreases%20by%20about%2010%25.

“Mortgage Calculator.” Bankrate, www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx.