How Rising Interest Rates Hurt Your Buying Power
You may not be under a tight deadline to buy your next home, but if getting the most bang for your money is important to you, you might want to buy sooner rather than later. Interest rates spent years at all-time lows in order to spur borrowing. Now, interest rates are on the rise again.
Part of what determines the interest rate you’ll pay is your credit score. The better (and higher) your score, the lower your interest rate. But as interest rates rise, you still pay more than you might otherwise -- no matter how good your credit is.
Take a look at this chart:
Image via Keeping Current Matters
Higher Interest Rates, Higher Payments
Let’s say you finance a $400,000 mortgage on a gorgeous home in Naples. At the best possible interest rate (3.75 percent, which is lower than average right now), your monthly mortgage payment would be $1852. At a higher rate, say 5.25 percent, you’ll pay an extra $356 per month.
Even if you choose a smaller home and finance a lower mortgage, your interest rate still matters. Between the lowest rate and the top rate, just on the chart above, your payment difference is more than $300 per month. Now imagine if you have a few credit problems or a not-so-perfect credit score.
Higher Interest Rates, Less Buying Power
Look a little closer at the chart. To keep in that $1850 or so monthly range, your buying power goes down as the interest rates go up.
- $400,000 at 3.75% is $1852 per month.
- $390,000 at 4% is $1862 per month.
- $380,000 at 4.25% is $1869 per month.
- $370,000 at 4.5% is $1874 per month.
- $360,000 at 4.75% is $1878 per month.
To stick with a similar monthly payment per month, you lose 10 percent or $40,000 of your purchasing power. Come in at a higher interest rate than 4.75 percent and, your options go down even more.
Lower Interest Rates for Shorter Mortgages
One way to pay a lower interest rate, even with fluctuations, is to choose a shorter mortgage. If you can afford it, consider a 15 year fixed mortgage and, according to current rates, your rate could be significantly lower -- four percent versus 4.58 percent. Your mortgage overall will be higher per month, but over time, you’ll spend less on interest. Whether this is your forever home, a stepping point before moving up or down, or a vacation home, if you can afford it, it may make more financial sense.
Adjustable-rate mortgages offer lower interest rates temporarily but they’re not the right option for many homebuyers. Trying to buy the most house for the least amount of money is a good idea but not if you’ll be stuck with an unaffordable payment in a few years. It’s important that you understand exactly what you’re getting into and know you can pay the new mortgage once the interest rate adjusts later.
If you plan to purchase a home this year, there’s no better time than right now. The longer you wait, the more you may pay in interest rates when you finance. To get current interest rate information and understand what your mortgage options are, talk to a qualified mortgage lender. Please let us know if you need some recommendations of great lenders.
If you’re ready to buy a new home before interest rates go up again, let’s talk.