The Impact of Mortgage Rates on Purchasing Power!

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Real Estate

Given the unprecedented decline in economic activity due to the pandemic, the Federal Reserve and congress have introduced an assortment of supports to stimulate recovery and keep money flowing. One of the upsides for prospective home buyers has been the drop in mortgage rates over the last few months. A good rule of thumb to remember is that every drop in 1% point in rate increases one’s purchasing power by 11%. Conversely, a 1% increase in the rate reduces one’s purchasing power by 11%. So if you could have afforded a $1m home at 3.75%, you can only afford a $888k home at 4.75.

Let’s say a couple qualifies for a purchase of $1m with 20% down at the rate of 3.75%. The payment of principal and interest on $800k loan (80% loan to value, i.e. “LTV”) would be $3700. If the rate drops to 2.75%, the payment is now $3266. If they are comfortable with the $3700 payment and want to keep it the same, that would be the principal and interest payment on a loan amount of $907,000, an 80% loan on $1.134m. In other words, they could afford an 11% more expensive home! Similarly, if rates were to go up to 4.75%, to keep the payment at $3700, the loan amount would have to drop to $710k, an 80% loan on $888k.

With rates at historic lows, you may be able to afford more than you think. Call us for help determining what you qualify for in today's market!