What The Rise In Interest Rates Means For Buying Power

Last year’s historically low rates have been replaced with rates that are still low in the grand scheme of things, but they do add quite a bit of money onto a monthly payment.

If you’re wondering if the recent rise in interest rates affects your buying power, the answer is yes.

Higher Interest Rates Reduce How Much Home You Can Afford

Of course, paying a higher interest rate means your monthly payment increases, but they also play a huge role in a buyer’s ability to buy a home at all. As part of the mortgage approval process, lenders look at the borrower’s debt-to-income ratio (DTI). To find this number, they look at how much debt a borrower has.

The debt they look at includes:

Auto loans
Student loans
Credit card minimum payment
Child support or alimony

They will look at the minimum monthly payment you’re responsible for and compare that to how much money you bring in each month. They’ll also add your projected mortgage payment to determine the DTI. Most lenders will not approve a mortgage if the DTI is over 45%, but they prefer it to be even lower than that.

With the increased interest rates adding at least $100 on to monthly payments, it decreases the amount of money a borrower can qualify for. If you were preapproved for a $400,000 mortgage a few months ago before the rate hike, there’s a good chance that amount has now decreased.

More Bad News

Not only are interest rates rising, but so are home values. In the past, when interest rates increased, housing prices dipped. So far, that’s not the case this time around, and prices continue to rise. No, they aren’t exploding like they did the last two years, but they are still creeping up. This means that the house you could have afforded earlier in the year may now be out of reach.

Should I Put Off My Home search?

If you are in a position to purchase a home today, we encourage you to do so. Home values will probably continue to rise, which is good news for homeowners. Plus, the alternative would be to rent a home, and rental rates continue to increase as well, which will end up costing you more money in the long run.

Interest rates go up and down, and if they were to drop in the future, you could always refinance your mortgage to take advantage of that savings.

We understand that all of this can be overwhelming, and we’re here to walk you through multiple scenarios so you can make a decision you think is best for you. The Villa Group is here to help you and guide you through this complicated process. Give us a call so we can discuss your concerns.