You may have heard of the term “buying power” but perhaps you’re unsure of what it really means. Put simply, it means you can buy more house. Let’s break down the math.
Let’s presume you are looking at a home with a sales price of $300,000 and you’d like to put 5% down. Now, let’s look at two rate scenarios on a 30 year fixed rate loan: 3.5% and 4.5%. Both rates are low, historically speaking. But what do they mean to your monthly payment?
Mortgage rates directly affect a buyer’s required monthly payment. In this scenario, at 3.5%, your mortgage payment (principal and interest) would be $1,279. At 4.5% your payment jumps up to $1,444. So, at the same purchase price, today’s low interest rates give you a savings of $165. Looking at it the other way, a payment of 1,444 with a rate of 3.5% would allow you to purchase a home valued at $338,000, thus giving you $38,000 more buying power for the same payment.
The lower the mortgage rate, the lower the interest. The lower the interest, the more affordable the home is on a month-to-month basis. In fact, with each 0.125% change in mortgage rates, your buying power can increase or decrease.
The national median sale price of an existing home is expected to grow to $270,400, an increase of 4.3 percent from 2019, according to the National Association of Realtors. If you can afford to buy now, it may makes sense to do so, especially if both home values and interest rates rise.
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