HOW INTEREST RATES AFFECT A BUYERS PURCHASE POWER
How do Interest Rates Affect A Buyers Purchase Power? Interest rates are just as important to a borrowers / buyers to keep their eye on Interest rates and purchase power can lower the price points when looking to buy based on the list price.
How so? Well . . . many buyers are on a monthly budget. Rather than looking at what they can borrow, i.e., their loan amount, they may look at what mean in their monthly housing payment.
Budgeting is a very key component to living! Either with rent or a home purchase, budgeting how much your monthly household costs are going to be is important.
Current Interest Rate — Monthly Budget
Let’s say the borrower/buyer wants to keep within a $1,200 per month budget for housing costs. With Principal and Interest, they can borrow $250,000 at 3.75% interest and they will have a payment of $1,042/month. With property taxes and insurance, added to that amount, that will round it out to their budget.
But if interest rates climb 2% . . . their Principal and Interest will be $1,313/month. And with property taxes and insurance added, they’ll be over $1,500.
| How Interest Rates Add Up | Less 10% Down Payment | @5.75% | @3.75% | ||
| Loan Amt | Principal/Int | Principal/Int | Difference | ||
| Purchase Price $250,000 | $225,000 | $1,313/mo | $1,042/mo | $271/mo | |
| Purchase Price $350,000 | $315,000 | $1,838/mo | $1,458/mo | $380/mo | |
| Purchase Price $500,000 | $450,000 | $2,626/mo | $2,084/mo | $542/mo | |
Interest Rates are Low
The current interest rates are low at the moment. Will they go up? Of course they will, but predictions aren’t showing them to rise too much — which is a good thing for those considering a home purchase.
What are Interest Rates Based On?
This is my disclaimer: I’m not a loan officer. While I know “of” the lending process and home loans, it’s best to talk to a competent loan officer.
Interest rates are comprised of:
- Credit Rating ~ The better the credit rating, the better the loan quote
- Income-to-Debt Ratios ~ What is your monthly “debt” compared to your monthly income
- Job History – How long have you been employed at your current position?
Loan underwriters are looking for stable employment, low income-to-debt ratios and good credit scores. The lender will offer a borrower/buyer better interest rates with less risky borrowers.