The Impact of rising rates on affordability Here is a great chart below to share with buyers that shows\u00a0as rates go up a buyer loses purchasing power.\u00a0 As you can see, with every 1% increase in rates, the buyer loses 10% in affordability. Let’s say someone was shopping in the $400k range but rates increased suddenly by 1%, unfortunately that same buyer will now only afford a $360k price range to keep the same monthly mortgage payment. <\/span><\/p>\n <\/span><\/p>\n The impact of rising rates on buyers approvals<\/span><\/strong><\/p>\n Unfortunately when rates start rising again, this is going\u00a0to\u00a0affect a buyer\u2019s purchasing power and monthly mortgage budget.\u00a0So it is going to be very important that buyers know if they can still qualify and can afford higher rates in their budget. For example, a pre approval that the buyer has had for\u00a03-6 months putting in offers at\u00a04.5% that stretched their budget, might be unaffordable\u00a0now because rates are at 5%.\u00a0For example, on a $400k loan the\u00a0payment increases\u00a0$121 a month when the rate jumps from 4.5% to 5%, this is a lot for a family of 4. <\/span><\/p>\n Higher rates\u00a0will\u00a0also affect\u00a0any current purchase offers or loan\u00a0approvals\u00a0that buyers may have. So for someone that was shopping in the $400k range a month ago and the rate was 4.5%, that same monthly payment will only get a home for $380k now with rates at\u00a05%. Remember\u00a0also, lenders have been tightening their qualifying ratios recently and are constantly changing their rules too, so double check to make sure any increase in rates\/payments do not disqualify a buyer from a certain price range either. <\/span><\/p>\n <\/span><\/p>\n <\/span><\/p>\n Cost vs price. What is the difference? <\/span><\/strong><\/p>\n <\/span><\/strong><\/p>\n Buyers have a tendency to look at just the PRICE of the house instead of the overall COST to buy the home. The cost is actually more important. So what is the difference between cost vs price and why is this so important for a buyer to understand? Cost is what a buyer will pay for a home overall, including financing costs. Price is just the actual price tag the buyer will pay the seller for the home not including any financing costs. <\/span><\/p>\n <\/span><\/p>\n This is why it is so important for buyers to understand that rising rates have a tremendous impact on a buyer\u2019s overall cost and monthly payment. We all know there are some home buyers still standing on the sidelines waiting for the prices of real estate to hit rock bottom. These are the buyers that need to understand cost vs price, once they understand this dynamic, then perhaps they will realize that now is a great time to buy a home and may make the decision to buy a home a lot sooner.<\/span><\/p>\n <\/span><\/p>\n Charting mortgage rates over the past 40 years<\/span><\/strong><\/p>\n <\/span><\/strong><\/p>\n Here is a great chart below to share with buyers that will give them a little history lesson on interest rates. The average interest rate over the past 40 years has been 9%!\u00a0Considering the heightened volatility that exists in the financial markets today, as we have the debt ceiling fiasco in Washington, the continued debt crisis in Europe and now talk of more Federal Stimulus aka Quantitative Easing part 3 from the Feds, buyers are taking a huge gamble in assuming that interest rates will remain this low. Because honestly no one really knows where they will be in 6 months due to the unprecedented circumstances we have in today’s financial markets. <\/span><\/p>\n
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