— Originally published in FLL#37
Seriously. How could you not read a column entitled “Math Lessons?” I mean, what crazy, awesome sex appeal that title has… right?
Hello? (Taps microphone) Is this thing on?
Okay. In all seriousness, math lessons may not be exciting or fun, but the results they show you (when discussing buying power) certainly are. As all indicators are pointing towards a rise in mortgage rates, I thought it would be an opportune time to show the impact of rising interest rates on your mortgage buying power.
Here’s where the math lesson comes in. For this example, we will look solely at the Principal+Interest (P+I) payment in an amount of $1,200 per month.* A conventional, thirty year fixed rate loan with a 20% down payment (at 3.75%/3.797% APR) would allow you to borrow just over $259,000 to achieve a monthly payment of $1,200. Acceptable, right?
But, what if the rate rises just a small amount (.50%) to 4.25%/4.302% APR? What impact does that now have? To maintain the $1,200 P+I payment, you would borrow only $243,950. This creates a difference of just over $15,000. That is $15,000 less in buying power for just a one-half of a percent upward change in interest rate. So, if the rate changes a full percent to 4.75%/4.808% APR (still very reasonable), your buying power decreases by over $30,000. That, my friends, is a substantial change in buying power! Imagine the difference in size and amenities you would see in homes priced at a $30,000 difference. Quite substantial indeed.
So, should you buy now? Well, if you are in the market, sooner is likely better than later when it comes to buying power. Think of it as “more for less.” The higher the interest rate, the less “home” you’ll get. Carpe Domus! (That’s Latin, baby!)
* Monthly payment does not include taxes or insurance, and may be higher. The 3.75% example is based on a sales price of $323,750, the 4.25% example is based on a sales price of $305,000, and the 4.75% example is based on a sales price of $287,500.