Friday Financial Tidbit-How higher mortgage rates affect how much house you can afford

Mortgage rates are rising ever so slightly from their historic lows. What does that mean for you?  Well in the short term it means that if you have been putting off refinancing your existing mortgage, you should probably do so now before rates rise even higher.  But what does it mean if you are thinking of buying a home?  It means the sooner you act, the more house you can buy.

Credit: Mortgages for less

Take for instance a $150,000 mortgage on a 15 year fixed rate. Currently you can get a 3.875% rate for a payment of ~ $1,100 a month. If the interest rate rises 0.5% to 4.375% your payment becomes $1,137 a month. If it rises a full 1.0% to 4.875% your payment jumps to $1,175 a month.  At 4.875%, you would have to take out a $140,000 mortgage to get the $1,100 mortgage payment you were getting at 3.875%. That means a 1% increase in rates means you buy 7% less in house. If the interest rate jumps 2% to 5.875% you would have to get a $131K mortgage to get the same $1,100 a month payment.

However, the longer the mortgage terms, the greater the disparity.  Take the same $150,000 mortgage but put it on a 20 year fixed term. Currently you can get a 4.25% rate for a payment of ~ $930 a month. If the interest rate rises 1.0% to 5.25% your payment becomes $1,010 a month. At 5.25%, you would have to take out a $138,000 mortgage to get the $930 mortgage payment you were getting at 4.25%. That means a 1% increase in rates means you buy 8% less in house. If the interest rate jumps 2% to 6.25% you would have to get a $127K mortgage to get the same $930 a month payment.

Granted, interest rates do not rise 1%-2% overnight, but if you are positioning yourself to buy a house soon, keep an eye on those mortgage rates. Yes, house prices could continue to drop, but those drops in prices could easily be offset by an increase in the interest rate that you pay. So if you are thinking of buying a home soon, hurry up and pay off your debt, build your emergency fund, and save for a down payment so you can get the best deal possible!

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About Jon White

Giving people hope and seeing them win with their finances is something I have a strong passion for. Because of this passion I started JW’s Financial Coaching in the summer of 2010. Financial coaching has allowed me to combine my passions of finances, teaching, and helping others by helping people get on the right track financially. I'm interested in hearing your story so please do not hesitate to interact with me through social media.
This entry was posted in Friday Financial Tidbit, Mortgage, Spending and tagged , . Bookmark the permalink.

2 Responses to Friday Financial Tidbit-How higher mortgage rates affect how much house you can afford

  1. I read, and this was a long time ago so I don’t remember the source, that house prices kind of adjust to the mortgage rates. so as rates go up house prices will remain stagnant, or even decrease a little to make up for the extra interest costs. I’ve done zero research on this info from an unknown source but it makes sense. Higher costs would decrease demand which would in turn lower the price of the house. they said that because of this, it’s actually better to buy during high interest rates because you will get the house for cheaper and then can refi when rates come down again. Interesting theory. Especially good if you can pay cash… cheaper house without any interest. 🙂

    • Jon White says:

      Thanks for sharing that Ashley. It does make sense how that works, although it is kind of scary to think that house prices could drop even *more* when these low interest rates do increase. With that being said, if I am in the market for a new home, I am not going to wait much longer to see if prices or interest rates drop any further. I am going to find a deal, purchase the home and finance it over 15-20 years and get about paying it off as soon as possible!
      Yes, I do like your idea of buying a house for cash. Won’t it be great to get to a point where you can actually do that?

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