Buyers Beware...As Interest Rates Rise, Your Purchase Power Drops!

Dated: March 1 2021

Views: 860

Have you been on the fence about purchasing a home? Maybe you've grown frustrated looking in this highly competitive market? Maybe credit repair or down payment savings is holding you up? Whatever the reason, there's a big reason to try making a move now. 

Interest Rates Play a Huge Role

When I purchased my first home, interest rates were 12 percent! And they were coming down from a high in the teens. At those rates, I could only qualify for a $100,000 house. But consider this, my purchase power at today's historic low rates would be over $250,000! Imagine that for a minute -- the same monthly payment for 2 1/2 times as much home.

Will interest rates ever get that high again? Let's hope not! But they are on the rise, as this graph from Freddie Mac illustrates. 

How Much of a Difference for You?

Here's a quick little example of rising rates vs purchase power. Let's say you qualified for a $350,000 home on January 1, 2021 when the 30-Year FRM was at 2.67% (a near historic low). Today, that FRM is about 3.0%. It is quite feasible that the FRM will reach 4.0%, a still relatively low interest rate, sometime in 2021. 

Are you sitting down? Because here's the rub, your purchase power has then dropped from $350,000 to $296,000! WOW. That is a major difference in what range of home you can buy, or even think about buying. 

For example, in Orleans Parish current single-family inventory, that price difference would immediately knock out 52 homes! This is the inevitable effect of raising interest rates.

Your Monthly Payment Won't Change

Keep in mind, as your purchase power declines, your monthly payment stays the same. So a buyer who purchase now when interest rates are low, will be paying the same note that the procrastinating buyer will be paying when interest rates are higher. Today's buyer will have a more expensive house, yet pay the same monthly payment. Don't miss this perhaps fleeting moment to make the absolute most of your purchase power at today's extra low interest rates.  

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Mark Boline

Highlights • Empathetic & Experienced Consumer Advocate • ABR – Accredited Buyer Representative • CARTUS trained Relocation Specialist • Leader in Real Estate Professional Standards • Real....

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