HOW RISING INTEREST RATES CAN IMPACT AFFORDABILITY

Chances are, you’ve probably heard a friend, neighbor or relative say they’re “waiting till prices come down further” to purchase real estate. Logic says we should support their desire to stay in a holding pattern; after all, buyers are getting deals every day right? Well, sort of.

Certainly home prices have dropped - dramatically even in some areas of the country - but I’m here to tell you that one of the most common myths among buyers is that waiting for a home price to drop is the best way to “get a deal.”

The truth? Interests rates can have a much more significant effect on price. In other words, locking in low interests rates will almost always nullify any price drop. Here’s the other caveat: the longer you wait for a home's price to drop, the more likely it is that interest rates will go up.

Let’s look at an example where an increase in interest rates are applied to a 30-year loan. As you’ll see in the table below, the effect of an increasing interest rate is huge - much bigger than a 10 percent drop in home price. Conversely, a drop in interest rate can significantly decrease the total interest paid over the life of a mortgage loan.

Example Home Purchase	Rates Up 1% and Prices Steady	Rates Steady and Prices Drop 10%	Rates Up 1% and Prices Drop 10%
Home Price	Home Price	Home Price	Home Price
$250,000	$250,000	$225,000	$225,000
Interest Rate	Interest Rate	Interest Rate	Interest Rate
4.23%	5.23%	4.23%	5.23%
Principal & Interest	Principal & Interest	Principal & Interest	Principal & Interest
$981.54	$1,101.93	$883.39	$991.74
Total Interest Paid	Total Interest Paid	Total Interest Paid	Total Interest Paid
$191,693	$245,869	$172,523	$221,282

The first scenario in the second column is historically more likely to happen than the latter two. And as we’ve witnessed over the past five years, mortgage rates have been falling to historical lows, making homes even more affordable for buyers.

It’s important that potential home buyers understand the positive financial impact low interest rates have on the cost of home ownership. For those who can afford to buy, trade up, or invest, our current market can save you thousands of dollars over the life of a typical mortgage loan and offer a lifetime of opportunity.

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