Posted by: Brian Powers | June 8, 2009

Interest Rates are Rising and Your Purchasing Power is Eroding

3 months ago in this blog I wrote about buyers who were trying to time the market and buyers who were nervously sitting on the sidelines because they were afraid the market hadn’t bottomed out yet (See I’m Not Buying a House Until the Market Bottoms Out!).

In that posting I specifically cautioned buyers about the effects a modest rise in interest rates would have on their ability to qualify to buy a home.  An excerpt from that blog posting:

“And furthermore, are you paying attention to the other factors that affect your ability to buy a home? What if the current spending and stimulus proposals put forth by the government lead to an inflationary affect on the economy and cause a jump in interest rates…do you know what a simple rate increase will do to your purchasing power as a buyer?

Well…guess what? Rates have risen!  3 months ago interest rates on a 30 year fixed loan were hovering at about 5%. Today they have krept up near 5.5%.  Let’s look at the impact this can have on a buyer’s ability to purchase a home.

Let’s say a buyer went to his or her mortgage broker at the beginning of March.  The buyer had a gross income of $60,000, a monthly car loan payment of $300, credit card payments of $100, and other monthly debt obligations of $200, with estimated property taxes of $3000 and homeowners insurance of $600 per year, and the buyer had $6000 available to use as a downpayment.  Using standard mortgage pre-qualification guidelines, at the beginning of March the buyer would qualify for a $173,653 home purchase.

Fast forward to today, with rates up to 5.5%. All other factors above remaining the same, the buyer now only qualifies for a $164,510.  That’s a $9000 dip in your purchasing power as a buyer!

What happens if rates go up to 6%?  Now you’re down to a $156,112 and you’ve lost over $17,000 of purchasing power.

You get the idea?

The truth is you’ll know when the real estate market has bottomed out when it is on its way up.  And if you’re trying to time the market, as you can see, there are factors such as interest rates that can throw an unexpected twist that negatively impacts your ability to buy a home.

Want to search the MLS?  Open up your FREE Listing Book account by clicking on the Listing Book link below:


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