I‘ve been getting ready for our monthly home buyer workshop tonight and it occurs to me that it’s been awhile since I’ve hopped up on my soap box to shout about interest rates.
Sometimes I think some people don’t fully appreciate just how much interest rates affect your purchasing power and monthly payment. I like to use the following rule of thumb:
When interest rates go up one percent your purchasing power goes down ten percent.
That’s big.
What I mean is the monthly payment would be approximately the same if you bump the interest rate up one percent and the price down ten percent. For more detail check out Price Isn’t Everything When Buying a Home from a year ago (handy chart included).
Interest rates in real life
After sitting below 5% for a few months, the national average interest rate for a 30-year fixed rate mortgage moved up from 4.91% to 5.59% over a recent two-week period. That’s just over half a point. Doesn’t sound like much, right?
Let’s say you you were buying a $200,000 house with 10% down, leaving a loan of $180,000. That little bit of movement would bump your payment up by $76 a month. Aside from the impact on your debt to income ratio and how it might affect qualifying for a loan, that little bump would mean more than $27,000 in interest over the life of the loan.
Of course this works in both directions, hence the aforementioned rule of thumb.
Bottom Line
Keep your eye on interest rates and remember that when rates go up one percent your purchasing power goes down ten percent.
If you’re in the market to buy a house, talk to your agent and your lender about the importance of locking your interest rate.
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