Interest rates today are much lower compared to rates before the collapse of the US housing market when a good rate was around 6%. The lower the interest rate the lower your monthly payment will be, which could result in more housing options.

In this post, I’ll share helpful home buying tips comparing the impact in your home buying power with a lower rate Vs. a higher rate – and how it may impact how much mortgage you can afford.

Your Home Buying Power and Your Home Loan Interest Rate

Let’s look at a hypothetical:

You’re ready to buy a home! You contact a local mortgage company and ask a loan officer, “How much mortgage can I afford”? The loan officer reviews your FICO credit score, monthly gross income, bank statements, etc. Then, the loan officer tells you that you may qualify for a monthly mortgage payment of $1,200 based on your debt to income ratio.

Now, your loan officer needs to figure out how much of a mortgage loan you could get with a payment of $1,200 a month. The loan officer compares potential rates to determine the mortgage amount you could borrow.

Let's assume you're eligible for a 30-year mortgage loan with a 4.25% interest rate.

With a 30-year loan and a 4.25% rate, you may be able to get a loan about $244,000. You’ll still need to find out if you’ll need to put any money down, which may be required.

What happens if interest rates increase?

Simply put, the amount of mortgage you may be able to afford may go down.

Before the 2008 US housing market collapse, rates were about 6% to 7%, which makes today’s rates look great! Even an increase is still a pretty great deal!

What if your rate increased from 4.25% to 5.25%?

Let’s look at another hypothetical: 

Let’s say you’re qualified for $1,200 a month (just like in the first hypothetical). After calculating your mortgage payment with a 30-year loan term and a 5.25% rate, your loan officer comes back to you with the total mortgage amount you may be able to get.

It’s now $218,000! That’s $26,000 less than the amount you could have got with a 4.25% rate!

As you can see from this hypothetical, an increase in rates could impact your home buying power. With interest rates today as low as they are, you could increase your power for buying a home with the right plan.

Thinking of buying a home?

Here are a few quick tips to get started:

1. Contact a local real estate agent in the real estate market you want to buy
2. Contact a local mortgage lender in the real estate market you want to buy
3. Figure out how much home you can afford with all of you expenses not just credit expenses
4. Be patient and ask question about anything you don’t understand