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How Do Higher Rates Affect Buying Power?

Couple Standing In Front Of Home Together

RATES BACK TO PRE-PANDEMIC LEVELS

We are officially back to pre-pandemic rate-levels, and it looks like rates will continue to climb in the short run at least.

Whether or not they ever come back remains to be seen.

HOW DO 1/2% HIGHER RATES AFFECT BUYING POWER?

The answer is “not that much,” but because so many buyers are now stretched to their absolute maximum allowable debt ratios, this is a very important consideration right now.

EXAMPLE #1: $500,000 PRICE; $400,000 MORTGAGE: $20,000 – $25,000 LESS BUYING POWER

A buyer in this price range loses about $20,000 to $25,000 of buying power when rates climb 1/2 percent from 2.75% to 3.25%.

Buyers in higher property tax areas (like Texas) lose less buying power from a rate increase because property taxes are a higher portion of their payment and remain fixed irrespective of rates.

EXAMPLE #2: $1M PRICE; $800,000 MORTGAGE: $40,000 – $45,000 LESS BUYING POWER

A buyer in this price range loses about $40,000 to $45,000 of buying power when rates climb 1/2 percent from 2.75% to 3.25%.

PROPERTY TAXES

There are numerous “buying power” calculators online but most of them focus only on mortgage amounts and not on purchase prices, which account for property taxes too.

It is important to remember that lower purchase prices result in lower property taxes, which offsets the effect of higher rates to some extent.

Hence, focusing only on mortgage amounts can be misleading, as such analyses will overstate the reduction in buying power.

RULE OF THUMB FOR THE EFFECT OF RATE INCREASES

Here is a rough “rule of thumb” for the effect rate increases have on buying power:

Each 1/2% increase in rates reduces buying power by about $5,000 to $6,000 per $100,000 borrowed.

This very rough rule of course depends on property tax rates and the total purchase price.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167