How Interest Rates Impact Buying Power

Real estate sales have benefited from mortgage rates drifting near historic lows for an extended period due to the Federal Reserve buying mortgage-backed securities to support the economy. It is widely expected for the Fed to taper off those purchases to curb rising inflation—and interest rates are expected to rise. 

If everything goes as expected, the Fed will enact its first rate increase in three years sometime next month, a move that buyers will grudgingly have to accept. Recent projections suggest the Fed may raise interest rates three to four times in 2022, with an expected initial increase of .25 percent to 0.5 percent.

The question for homebuyers is: how will the higher interest rates affect your buying power?

The straightforward answer is that the higher your mortgage rate is, the higher your monthly payments will be, thereby reducing your purchasing power. For every 1% increase in interest rates, buying power decreases by about 10%.

Let's take a look at how much impact increases of 0.25% can have on your buying power if you’re trying to keep monthly payments at $4,400:

As you can see, if you’re budgeting for a maximum monthly payment of $4,400 for your combined principal and interest payment, the total amount you can afford to borrow is reduced as interest rates go up. Now may be a good time to purchase a home while rates are still low. Every rate jump throughout the year will impact what home you can afford to purchase.

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