Interest Rates and Their Impact on Home Ownership

Market fluctuations have given us interest rates as low as 3% in recent years, but interest rates at around 5 to 6%—or even higher—shouldn’t stop anyone from buying.

Interest rates impact affordability. As an example, the Motley Fool website showed how large a loan a borrower could obtain for a $1,025 monthly payment, given various interest rates. Here’s what happens to borrowing power with just a 1% increase in interest rates:

• 4.35%: $205,959
• 5.35%: $183,608

The rule of thumb, Motley reported, is that each quarter point swing in interest rates changes the amount a borrower can borrow by about 3%, so a 1% increase would reduce the borrower’s borrowing power by a whopping 12%. There’s no time to waste.

From a buyer’s standpoint, the one silver lining to rising interest rates is that they tend to have a downward pricing pressure on appreciation. So even when interest rates are on the rise, buyers should understand that they’re likely paying less for a home than they would be if interest rates were lower. Most financiers agree that the exact timing of a home purchase will have little impact overall. Homeowners generally always come out ahead of renters. ~National Association of Realtors