How the Interest Rate Affects Your Purchasing Power as a Buyer

After hitting historic lows last year, interest rates are on the rise again. And experts predict rates will continue to rise over the coming months. 

So what does that mean for buyers looking for a home in 2022? 

Understanding how rising interest rates will affect your ability to buy a home is an important consideration. To that end, here’s a quick look at how changing interest rates affect your purchasing power as a buyer.

How Do Interest Rates Relate to Purchasing Power?

As the market fluctuates, interest rates shift along with it. And the current interest rate is a major factor in determining your monthly mortgage payments as well as the total amount you’ll pay for your home over the life of your mortgage. This affects how much you can afford to spend on a home when you buy—in other words, your purchasing (or buying) power.

Simply put, purchasing power is the price of home you can afford based on your budget.

Higher interest rates mean you’ll spend more money on interest over the life of your home loan, meaning your monthly payments will be higher and you’ll pay more for your home in the long run. 

The higher the interest rate, the less house you can afford.

In fact, for every 1% that interest rates go up, your buying power decreases by about 10%. As a buyer, I don’t blame you if those numbers scare you—after all, that’s a lot of buying power lost!

But don’t panic—this doesn’t mean that buying in this market is necessarily a bad idea. 

Should You Buy Now or Wait?

So, rising interest rates = less purchasing power…but does that spell doom for today’s home buyers? Not necessarily. 

There are many factors that go into determining if now is the right time for you to buy, and interest rate is only one of them. Here are a few more to consider:

• Your overall financial health. A lot depends on your overall financial situation. If you have a great credit score, a low debt-to-income ratio, and the means to make a larger down payment, you could qualify for a lower interest rate and therefore gain back some buying power. If your financial health isn’t where you want it to be, work to pay down debt, improve your credit score, and save for a higher down payment. All of these things can improve your buying power.
• Your price point. While the housing market as a whole is pretty tight right now, it really depends on the price range you’re looking at. Some price points will have more inventory and less competition than others, making it easier to find a house that fits your budget. Check with your Realtor^Ⓡ for current inventory levels in your area.
• Buying vs renting. When home prices are on the rise, the cost of rent typically outpaces the cost of mortgage payments, even when interest rates are high (though every market is different). So if you’re choosing between buying a home and renting, it may make more sense to buy, even though you’ll be paying more in interest.
• Life events. If your family is growing and you need more space, you have to move for a job, or another life event spurs you to move, whether or not it’s the ideal market really doesn’t matter. You have to move regardless. So even though interest rates are high, it still may be the right time for you to buy.

And don’t forget about the option of refinancing. Even if you get a loan with a higher interest rate now, you can always refinance when rates go down again. Just keep an eye on the market and contact your lender about refinancing when mortgage rates drop.

3 Tips for Buyers Navigating Rising Interest Rates

If you are out there house hunting right now, here are a few tips to make the process a little less stressful for you.

1. Be Honest With Your Lender

One of the biggest mistakes I’ve seen buyers make is not being as honest as they should be with their lender. It’s crucial to be truthful about your situation so your lender can help you get the best rate possible and the right type of loan for your needs. 

2. Don’t Get Emotionally Tied to Interest Rates 

Another mistake many buyers make is getting emotionally tied to interest rates. The fact of the matter is that interest rates will drop again (eventually). It may take 18 months, it may even take a few years…but they will drop. The question is, will it be smarter to spend an extra $6,000 now to buy down your interest rate and save $50 a month on your mortgage payment? Or is it smarter to pocket that $6,000 and refinance down the road? The key to determining what’s best for you is having a lender you trust to help you strategize.

3. Work With a Lender You Trust

It’s SO important to find a lender you trust, as they can be your guide to making smart financial decisions. If you’re not sure where to start with finding a lender, I am happy to recommend some I have worked with. My lender, who I have worked with both personally and professionally, is Ali Massa with Results Mortgage. Check out her website here, where you can find her contact information and apply for a loan online.

One final tip to make your buying experience the best it can be in any market: work with a great Real Estate agent! As an agent with RE/MAX Results, I’ll take the time to listen to your needs so I can provide you with the utmost in quality service and help you find the home of your dreams at the best possible price.

If you’re ready to start the search for your new home, I’d love to come alongside you and help. Give me a call at 612-227-5537 to get started!