How Mortgage Rate Hikes REALLY Affect You Financially

Q: Gerald, my mortgage broker is telling me that mortgage rates are going to go up and that I should buy a home now before they do. Even if rates go up a little, won’t they still be historically low? Should I buy now? Carrie, Boulder, CO

A: Great question, Carrie. The simple answer to your 1st question is yes, even if mortgage rates go up a little they’ll still be historically low, however that doesn’t necessarily mean that you should buy now. You’ve got to look at your personal goals and financial situation to make an intelligent decision on whether to buy a home, but let’s look at how mortgage rate movements will affect your financial ability to buy.

What I’m going to do is give you a simple trick to help you calculate that impact quickly and easily. Basically for every 1% increase in interest rate, your purchasing power as a homebuyer declines by 9%. So, for example, if you are now able to afford to buy a $200,000 home ($200,000 is close to the median home price in the US now and is a nice round number for the sake of simplicity) and mortgage rates increased by 1%, your purchasing power would go down 9% or $18,000 meaning that you would now be able to only afford an $182,000 home.

So, the financial impact of a mortgage rate increase (assuming your personal financial situation stays the same) is that you can’t afford as much home or put another way, you’ll probably have to buy a lower priced house.

Thanks for your question, Carrie. Good luck.

For more real estate tips and information visit my blog at geraldlucas.com.