Impact of Interest Rates on Homeownership
Market fluctuations have given us mortgage interest rates as low as 3% in recent years, but interest rates at 5% to 6% (or even higher) shouldn’t stop anyone from buying. Interest rates do impact affordability, however. Below you can see 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% interest rate increase:
- 4.35%: $205,959
- 5.35%: $183,608
So how does a quarter point increase in mortgage rates impact buyers?
The rule of thumb 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%.
From a buyer’s standpoint, the one silver lining to rising interest rates is that they tend to have a downward pricing pressure. 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.
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The Federal Reserve doesn’t set mortgage rates, but its actions indirectly affect mortgage rates. As of its December 2022 meeting, the Fed has raised a benchmark interest rate by a total of 425 basis points, or 4.25 percentage points, in 2022. Mortgage rates have risen less, with the average interest rate for a 30-year fixed-rate mortgage going from around 3.2% in early January to 6.3% in early December.
Learn more about How the Federal Reserve Affects Mortgage Rates here.
Interested in more information on how a quarter point increase in mortgage rates impact buyers? Reach out!
Jennifer Blanchard Team
Berkshire Hathaway HomeServices NJ Properties