Lately I have had people asking me about home prices and interest rates…how much impact does interest rate actually have on the price home you can afford to buy? Does it make sense to wait and see if prices come down more? What will happen if you wait and interest rates go up?
So…I pulled some information to compare. The charts below show that the higher your price range the bigger the impact of higher interest rates.
For ease of comparison I did a range between 5.0% and 6.5% by 0.5% increments for all the examples below. As buyers in the lower price ranges are more likely to use a 3.5% down payment with FHA financing, buyers in the mid range may use 5% down conventional financing if available and buyers in the upper price ranges are more likely to use 20% down conventional financing I used that criteria in the three examples below. Note that while down payment amount obviously makes a difference in your monthly payment, it does not affect the impact of interest rate changes when other factors are constant.
As you likely are aware, interest rates are in a continuous state of flux and your rate is also closely tied to your credit score. Last Friday conventional rates were in the 5.125%-5.625% range…FHA rates were in the 5.5%-6.0% range…who knows what they will be this week!
Most sources say interest rates are more likely to go up than down…and that the combination of low interest rates and low home prices makes this "the buying opportunity of our lifetime".
If you are planning to pay about $860 a month, you could buy a $130,000 house at 5.0% interest. At an interest rate of 6.5% you could buy a $114,000 house for about the same monthly payment…a difference of $16,000 in home price.
If you plan to make payments of about $1,456 per month you could buy a $217,000 house at 5.0% interest. If rates increase to 6.5% you could buy a $192,000 house with the same monthly payments…a difference of $25,000.
The biggest difference is realized in higher price ranges. If you are prepared to spend about $2,285 per month you could buy a $417,000 house at 5.0% interest. If rates increase to 6.5% the house you can buy for the same monthly payment drops to $367,000…a difference of $50,000!
NOTE: monthly payments in the examples above are for a house; if you are purchasing a condo or townhome, association fees must also be included in calculating monthly maximum payments for mortgage financing