Real Estate - Hands holding money - Lower Interest Rates

Interest rates are going to have an effect on a buyer’s purchasing power, that much we know. However, how much of an effect do they have? How significantly can a 1% interest rate increase affect how much house you can afford?

That’s what we’re going to look at today.

Low-interest rates affect buyer spending

At the time of writing this article, interest rates for a 30-year fixed-rate mortgage is 3.010%, so it’s no wonder that 99% of real estate agents who have participated in HomeLight’s Q3 Survey have said their market is on the rise. When the interest rates are so low, of course, people will want to take advantage of that to finally make a move on buying a house or car. 

When a buyer takes out a low-interest loan, they’ll have more money to spend. As more money is being spent, the better the economy will be. Now, with that said, when the economy is doing well, the Federal Reserve Board will increase the rates, therefore leaving borrowers with less money to spend. 

How interest rates increase or decrease purchasing power?

Let’s say you are approved for a $400,000 loan at 3.5% interest. With this rate, your mortgage payment could be as low as $1,500 per month, not including taxes, homeowner’s insurance, and HOA fees if applicable. 

However, if you were to get approved for a mortgage with a 4.6% interest rate, your buying power drops significantly! At this rate, you would only be able to afford a home priced lower than $375,000.  

How do interest rates affect inflation and recession?

Although inflation occurs when the economy is booming, that also means that the price for things will rise. In terms of the real estate market, people looking to list their homes will want to do so during an inflationary period because they can ask more for their house But, you have to keep in mind that with increasing rates, people are going to be more hesitant to make large purchases because… Well, it’s going to cost more!

However, when the economy is slow and interest rates are down (like it is right now), the economy is entering a recession. Buyers are going to come out en masse to take advantage of those low rates. Of course, this is providing that people qualify for a mortgage and they aren’t discouraged by an uncertain housing market. Should you decide to list your house during a recession, you may not be able to get as much as you’re asking for. On the flip side, since the rates are low and it’s a seller’s market and inventory is low, there’s a very good chance that there may be a bidding war for that property.

Interest rates and purchasing power

Now that the interest rates are so low, it would be in your best interest to buy a house if you’ve been thinking about it and are able to do so. With the interest rates being this low, buyers will be able to buy a more expensive house (if they choose). And, by locking in your rates now with a fixed-rate mortgage, you’re ensuring that you’ll have low monthly payments and they won’t increase when interest rates finally go back up. 

Just remember that when you’re thinking about buying, you’re going to want to get pre-approved for a mortgage and find a local realtor with a proven track record. They’ll be able to find a house that meets your needs and your budget!

Related: Why 2020 is the Best Year to buy a new home

September 2020 East Bay Market Update

Town Real Estate Concierge Program

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